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Homework answers / question archive / An adjustable-rate preferred share is currently selling at a dividend yield of 9%
An adjustable-rate preferred share is currently selling at a dividend yield of 9%. Assume that the dividend rate on the stock is adjusted once a year and that it is currently paying an annual dividend of $5.40 a share. Because of major changes that have occurred in the market, it's anticipated that annual dividends will drop to $4.50 a share on the next dividend adjustment date, which is just around the corner. What will the new dividend yield on this issue be if its market price does not change? What will the new market price on the issue be if the stock's dividend yield holds at 9%? What will it be if the yield drops to 7%?
Computation of the new dividend yield:-
Dividend yield = Annual dividend / Current market price
9% = $5.40 / Current market price
Current market price = $5.40 / 9%
= $60
New dividend yield = Annual dividend / Current market price
= $4.50 / $60
= 7.50%
Computation of the new market price if yield is 9%:-
Dividend yield = Annual dividend / New market price
9% = 4.50 / New market price
New market price = $4.50 / 9%
= $50
Computation of the new market price if yield dros to 7% :-
Dividend yield = Annual dividend / New market price
7% = 4.50 / New market price
New market price = $4.50 / 7%
= $64.29
