The required return of preferred stock is equal to the ________ ________ on the preferred stock.

• A. dividend yield
• B. coupon rate
• C. par value
• D. market price

Answer: (A)

Verified step by step guidance

1. Understand the concept of preferred stock: Preferred stock is a type of equity security that typically pays a fixed dividend and has priority over common stock in the event of liquidation.
2. Learn about the required return: The required return is the minimum return an investor expects to earn from an investment, considering its risk level.
3. Recognize the formula for dividend yield: Dividend yield is calculated as the annual dividend divided by the market price of the preferred stock. In MathML, the formula is: $\frac{\mathrm{Annual\; Dividend}}{\mathrm{Market\; Price}}$
4. Understand the relationship: The required return on preferred stock is equal to the dividend yield because investors base their return expectations on the dividends they receive relative to the stock's market price.
5. Review the options provided: The correct answer is 'dividend yield,' as it directly represents the required return on preferred stock based on the formula and investor expectations.