X-Tech Company issued preferred stock many years ago. It carries a fixed dividen
ID: 2717517 • Letter: X
Question
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 soared from the original 9 percent to 14 percent (yield is the same as required rate of return).
What was the original issue price? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
What is the current value of this preferred stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
If the yield on the Standard & Poor’s Preferred Stock Index declines, how will the price of the preferred stock be affected?
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 soared from the original 9 percent to 14 percent (yield is the same as required rate of return).
Explanation / Answer
Answer:
a) Original issue price = Fixed dividend/Original required rate of return = $12/9% = $133.33
b) Current value of share = Fixed dividend/Current required rate of return = $12/14% = $85.71
c) The price of preferred stock will increase.
Explanation: A preferred srock is a nature of fixed income instrument, so the price of preferred stock is inversely related to its yield. Therefore the stock price would increase with decline in yield on the Standard & Poor’s Preferred Stock Index declines.
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