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Homework answers / question archive / X-Tech Company issued preferred stock many years ago
X-Tech Company issued preferred stock many years ago. It carries a fixed dividend of $12 per share. With the passage of time, yields have changed from the original 13 percent to 16 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.) b. What is the current value of this preferred stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.) c. If the yield on the Standard & Poor’s Preferred Stock Index declines, how will the price of the preferred stock be affected? multiple choice The price of preferred stock will increase. The price of preferred stock will decrease.
Price of preferred stock =annual dividend/required rate of return
a. Original issue price=annual dividend/original required rate of return=12/13%=92.31
b. Current value of preferred stock=12/16%=75
c. Yield is inversely proportional to the price of the price of stock where we have already seen in the above formula.
As the yield decreases, the price of the preferred stock will increase.
