Question

X-Tech Company issued preferred stock many years ago. It carries a fixed dividend of $14 per share. With the passage of time, yields have changed from the original 10 percent to 17 percent (yield is the same as required rate of return). a. What was the original issue price? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Original issue price b. What is the current value of this preferred stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

The original issue price for X-Tech Company's preferred stock is $140.00, calculated by dividing the fixed dividend of $14 by the original yield of 10%. The current value of the stock is $82.35, which is the result of dividing the fixed dividend by the current yield of 17%.

Step-by-step explanation:

The question revolves around the calculation of the original issue price and current value of preferred stock. This involves understanding how the fixed dividend payout and the changes in yield, or required rate of return, influence a stock's price.

To calculate the original issue price, we use the formula: Issue Price = Fixed Dividend / Original Yield. Given the fixed dividend of $14 and the original yield of 10%, the issue price would be Issue Price = $14 / 0.10 = $140.00.

For the current value of the preferred stock, we apply the formula: Current Value = Fixed Dividend / Current Yield. With a current yield of 17%, the current value is Current Value = $14 / 0.17 = $82.35.

These calculations help in determining how the value of a stock changes as market conditions fluctuate, affecting the investor's total returns from both dividends and potential capital gains.