6. Preferred stock Aa Aa Preferred stock is often called a hybrid security becau

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 Most issues pay quarterly dividends. Some issues are perpetual, and do not mature.O Debt Common stock Consider the case of Green Caterpillar Garden Supplies: Green Caterpillar Garden Supplies pays an annual dividend rate of 17.80% on its preferred stock that currently returns 23.85% 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 Green Caterpillar's preferred stock? O $80.60 per share O $102.99 per share O $74.63 per share O $65.67 per share Suppose that due to high inflation, interest rates rise and pull the preferred dividend yield to 34.58%. Then the value of Green Caterpillar's preferred stock will returns) and security values are to This is because interest rates (and security related.

Explanation / Answer

Most issues pay quarterly dividend - DEBT

Some issues are perpetua, and do not mature - EQUITY

Annual dividend rate = 17.80% and par value = $100 ; hence annual dividend = $17.80. Then current price = 17.80 / 23.85% = $74.63 per share

If the dividend yield moves to 34.58%, then the curren price should be = 17.80/34.58% = $51.47

Hence the preferred stock value decreases to $51.47. This is because interest rates (and security returns) and security values are inversely related.

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