North Pole Cruise Lines issued preferred stock many years ago It carries a fixed

Question

North Pole Cruise Lines issued preferred stock many years ago It carries a fixed dividend of $6 per share. With the passage of time, yields have soared from the original 6 percent to 14 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? The price of preferred stock will increase. The price of preferred stock will decrease

Explanation / Answer

(a) Original Price = Dividend Per share/Dividend Rate

= $6/006

=- $100

(b) Current Value= Dividned per share/ Current Rate of Dividend

= $6/0.14

= 42.86

(c) The price of preferred stock will increase as yields decline. Since preferred stock is a fixed income security, its price is inversely related to yields.

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