Problem 9-8 Preferred stock valuation Ezzell Corporation issued perpetual prefer

Question

Problem 9-8
Preferred stock valuation

Ezzell Corporation issued perpetual preferred stock with a 8% annual dividend. The stock currently yields 10%, and its par value is $100.

What is the stock's value? Round your answer to two decimal places.
$  

Suppose interest rates rise and pull the preferred stock's yield up to 13%. What would be its new market value? Round your answer to two decimal places.
$  

ANSWER AND EXPLAIN FULLY

Problem 9-8
Preferred stock valuation

Ezzell Corporation issued perpetual preferred stock with a 8% annual dividend. The stock currently yields 10%, and its par value is $100.

What is the stock's value? Round your answer to two decimal places.
$  

Suppose interest rates rise and pull the preferred stock's yield up to 13%. What would be its new market value? Round your answer to two decimal places.
$  

Explanation / Answer

Annual Dividend = 8%

Par Value =$ 100

Annual Dividend amount = $ 100 * 8% = $ 8

Current Yield = 10% or 0.10

Preferred stock pays the same dividend perpetually. Such a stock can be valued using the formula

Price = Dividend / Yield

Price of Preferred stock = $ 8 / 0.10 = $ 80

If the yield on preferred stock goes up to 13% or 0.13

New Market Value = Dividend / New Yield   = $8/ 0.13 = $ 61.5385 or $ 61.54 (rounded off)

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