Question

Preferred stock valuation: TXS Manufacturing has an outstanding preferred stock issue with a par value of ​$6666 per share. The preferred shares pay dividends annually at a rate of 1111​%. a. What is the annual dividend on TXS preferred​ stock? b. If investors require a return of 77​% on this stock and the next dividend is payable one year from​ now, what is the price of TXS preferred​ stock? c. Suppose that TXS has not paid dividends on its preferred shares in the past two​ years, but investors believe that it will start paying dividends again in one year. What is the value of TXS preferred stock if it is cumulative and if investors require​ a(n) 77​% rate of​ return?

Answer 1

(a) $7.26

(b) $103.71

(c) $21.78

Step-by-step explanation:

(a) Annual dividend = Par value of share × Dividend rate

= $66 × 11%

= $7.26

(b) If investors require a return of 7​% on this stock.

Price of the stock = Dividend ÷ Required return

= $7.26 ÷ 7%

= $103.71

Therefore, the price of the share is $103.71.

(c) Since the amount of dividend is cumulative, that means it keeps on adding.

Therefore, at the end of the 3rd year when the company started paying dividend, then it will have to pay the dividend for the entire 3 years together.

Dividend = Annual dividend × 3

= $7.26 × 3

= $21.78

• If investors require​ a 7​% rate of​ return.

Price of the preferred stock = Dividend ÷ Required return

= $21.78 ÷ 7%

= $311.14

Therefore, the price of the share is $311.14