6. Preferred stock Aa Aa Preferred stock is often called a hybrid security becau
ID: 2820998 • Letter: 6
Question
6. Preferred stock Aa Aa Preferred stock is often called a hybrid security because it has some characteristics that are typical of debt and others that are typical of common equity. The following table lists several characteristics of preferred stock. Determine which of these characteristics are consistent with debt securities and which are consistent with common stock. Characteristic Its dividends are fixed in amount. It has a par, or face, value Debt Common stoc case of Fuzzy Button Clothing Company Fuzzy Button Clothing Company pays an annual dividend rate of 13.20% on its preferred stock that currently returns 17.69% and has a par value of $100.00 per share. The preferred stock issue does not mature, and computes its annual dividend as the product of its dividend rate and its par value. What is the current market value of Fuzzy Button's preferred stock? O $65.67 per share O $80.59 per share O $74.62 per share $102.98 per share Suppose that due to high inflation, interest rates rise and pull the preferred dividend yield to 25.65%. Then the value of Fuzzy Button's preferred stock will returns) and security values are to related . This is because interest rates (and securityExplanation / Answer
Current Market Value of the Preferred Stock is calculated by using the following formula
Current market Value of the Preferred stock = Annual Preferred Dividend / Required rate of return
Annual Dividend = Par Value x Preferred Dividend Rate
= $100 x 13.20%
= $13.20
Therefore, The Current market Value of the Preferred stock = Annual Preferred Dividend / Required rate of return
= $13.20 / 0.1769
= $74.62
“Current market Value of the Preferred stock = $74.62”
Value of Preferred Stock at a yield of 25.65%
The Value of Preferred stock = Annual Preferred Dividend / Required rate of return
= $13.20 / 0.2565
= $51.46
“Suppose that due to high inflation, interest rates rise and pull the preferred dividend yield to 25.65%, then the value of fuzzy buttons stock will fall or decrease to $51.46”
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