Question

Earley Corporation issued perpetual preferred stock with a 9% annual dividend. The stock currently videos 8%, and its par value is 3100 . Hound your answers to the nearest cent.

a. What is the stock's value? 5.
b. Suobose interest rates rise and pull the preferred stock's yield up to 14\%. What is its new market value? 5

Answer 1

To calculate the value of the preferred stock, divide the annual dividend by the current yield. If the yield on the stock rises, use the same formula to calculate the new market value.

To calculate the value of the preferred stock, we need to divide the annual dividend by the current yield. The annual dividend is 9% of the par value, which is $100. So the annual dividend is $9. The current yield is 8%, which can be written as 0.08.

Dividing the annual dividend by the current yield gives us $9 / 0.08 = $112.50. Therefore, the stock's value is $112.50.

If the yield on the preferred stock rises to 14%, we can use the same formula to calculate the new market value. The annual dividend is still $9, but the current yield is now 14%, or 0.14. Dividing $9 by 0.14 gives us $64.29. So the new market value of the stock is $64.29.