Question

Preferred stock valuation TXS Manufacturing has an outstanding preferred stock issue with a par value of $63 per share. The preferred shares pay dividends annually at a rate of 12%.

a. What is the annual dividend on TXS preferred stock?

b. If investors require a return of 6% on this stock and the next dividend is payable one year from now, what is the price of TXS preferred stock?

c. Suppose that TXS has not paid dividends on its preferred shares in the past two years, but investors believe that it

will start paying dividends again in one year. What is the value of TXS preferred stock if it is cumulative and if investors require a(n) 6% rate of return?

a. The annual dividend on TXS preferred stock is $

(Round to the nearest cent.)

Answer 1

Part (a):

Annual dividend on preferred stock= $7.56

 

Calculations as below:

Annual dividend = Par value* Dividend rate

                              = 63*12%

                              = $7.56

 

Part (b):

Price of the preferred stock= $123

 

Calculations as below:

Price today= D/r

Where D= annual dividend ($7.56 as above) and r= required rate of return (given as 6%)

Plugging the inputs, price today = 7.56/0.06

                                                         = $123

 

Part (c):

If dividend for the last 2 years are to be paid in one year, price today = $137.43

 

Calculations as below:

Price in year 1 (P1) = D/r= 123

Dividend for 3 years to be paid in year 1 = 7.56*3

                                                                        = $22.68

 

Total cash flow in year 1 = 123 + 22.68

                                            = $145.68

 

Price today (PV) = Cash flow in year 1/(1+r)

                             = 145.68/(1+0.06)

                             = 145.68/1.06

                             = $137.43

a. Annual dividend on preferred stock= $7.56

b. If dividend for the last 2 years are to be paid in one year, price today = $137.43