Several years ago, Rolen Riders issued preferred stock with a stated annual dividend of 10% of...

Several years ago, Rolen Riders issued preferred stock with a stated annual dividend of 10% of its $100 par value. Preferred stock of this type currently yields 8%. Assume dividends are paid annually.

a. What is the estimated value of Rolen’s preferred stock?

b. Suppose interest rate levels have risen to the point where the preferred stock now yields 12%. What would be the new estimated value of Rolen’s preferred stock?

Expert Solution

a. Preferred Dividend = Par Value * Rate of Dividend

= $ 100 * 10%

= $ 10

The estimated value of Rolen’s preferred stock = Preferred Dividend / Current Yield

= $ 10 / 8%

= $ 125

Answer = $ 125

b.

The estimated value of Rolen’s preferred stock = Preferred Dividend / Current Yield

= $ 10 / 12%

= $ 83.33

Answer = $ 83.33

jeff jeffy answered 2 years ago

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