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http: /courses aplia com af servlet/quiz quiz_action-take uz&quiz; Aplia: Student Question eEconomics question Chegg c Previous Net2 Options X Find: Previous Next Options Graded Assignment | Read Chapter 7 | Back to Assignment Due Wednesday 04.13.16 at 10:45 PNM Attempts: Keep the Highest:/2 2. Valuing preferred stock Aa Aa Companies that have preferred stockholders promise to pay a stated dividend for an infinite period. Preferred stock is treated like a perpetuity if the payments last forever. Preferred stocks are considered to be a hybrid of a stock and a bond. Companies can suspend the dividend paid to preferred stockholders without throwing the company into bankruptcy As with bonds, preferred stockholders receive a fixed dividend before earnings are paid out to common stockholders and, as with common stock, preferred stockholders can benefit from potential appreciation in the value of stock. Underwood Transcontinental Corp. pays an annual dividend rate of 8.00% on its preferred stock that currently returns 10.72% and has a par value of $100.00. what is the value of Underwood Transcontinental Corp.'s stock? O $111.94 O $100.00 O $89.56 O $74.63 Suppose, due to high inflation, interest rates rise and pull the preferred stock's yield to 13.94%. The value of the preferred stock will decrease increase Flash Player WIN 20,0,0,228 03 3.34 © 2004-2016 Aplia. All rights reserved Session Timeout 59:41 Grade It Now 12:36 PM 4/8/2016Explanation / Answer
(a) Value of preferred stock = Dividend / Rate of return .....(1)
= $100 x 8% / 0.1072 = $8 / 0.1072
= $74.63
(b) From equation (1), we see that, as Yield (Return) increases, value of preferred stock decreases.
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