ANZ Bank Ltd periodically issues preference shares to investors. ANZ is a commercial bank mainly operating in Australia and New Zealand. A batch of ANZ preference shares that was issued in 2016 pays a fixed dividend of A$3 per year. These preference shares are currently selling at A$53 (as quoted on the ASX). The company has just released a new 5 year profit plan which predicts that earnings will grow at the rate of 5 per cent annually.
a) What is the expected rate of return if investors are buying ANZs preference shares in the secondary market today at this price?
b) If you, an individual investor, had a required rate of return of 6.75 per cent, what is the maximum price you should be willing to pay for these preference shares in Australian dollars?