Barnes Air Conditioning Inc. has two classes of preferred stock: floating rate p

Question

Barnes Air Conditioning Inc. has two classes of preferred stock: floating rate preferred stock and straight (normal) preferred stock. Both issues have a par value of $100. The floating rate preferred stock pays an annual dividend yield of 4 percent, and the straight preferred stock pays 5 percent. Since the issuance of the two securities, interest rates have gone up by 2.50 percent for each issue. Both securities will pay their year-end dividend today.

a) What is the price of the floating rate preferred stock likely to be?

b) What is the price of the straight preferred stock likely to be? Refer back to Chapter 10 and use Formula 104 to answer this question

Explanation / Answer

Since the floating rate preferred adjusts for the increase in interest rates it price is likely to continue to be $100.

The straight preferred will adjust so its yield is the 5.00 +2.50= 7.50 . So 100*.05/.075= $66.67

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