Question

- Earley Corporation issued perpetual preferred stock with a 12% annual dividend. The stock currently yields 10%, and its par value is $100. Round your answers to the nearest cent. What is the stock's value? Suppose interest rates rise and pull the preferred stock's yield up to 13%. What is its new market value?

- Farley Inc. has perpetual preferred stock outstanding that sells for $36 a share and pays a dividend of $5.00 at the end of each year. What is the required rate of return?

Answer 1

- Earley Corporation's perpetual preferred stock annual dividend is 12%  and its par value is $100.

Annual dividend: Par Value * Dividend rate = $ 100 * 12% = $ 12

Stock's currently yields 10% (given)

We know that;

Stock yeild = Annual dividend / Stock value

hence, Stock Value = Annual dividend / stock yeild = $ 12/0.10 = $120

If the interest rates rises to 13 % ; then

Stock Value = Annual dividend / stock yeild = $ 12/0.13 = $92.30

- Farley Inc.'s perpetual preferred share price: $36 and pays a dividend of $5.00.

Required rate of return: Annual dividend/ share price = $5/$36 = 0.1388 or 13.88%

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