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 10-4 to answer this question.

Formula 10-4 is Kp=Dp/Pp

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 10-4 to answer this question.

Explanation / Answer

a) Floating rate preferred stock price will be at par value = $100 as the coupon rate will increase with increase in interest rate and would have no impact on price.

b) For straight preferred stock, Dividend = 5% x 100 = $5

If interest rate increase to 5 + 2.5% = 7.5%, then Price = Dividend / Rate = 5 / 7.5% = $66.67

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.