Question

Problem 14-03

What should be the prices of the following preferred stocks if comparable securities yield 8 percent? Use Appendix B and Appendix D to answer the questions. Round your answers to the nearest cent.

MN, Inc., $11 preferred ($110 par)

$  

CH, Inc., $11 preferred ($110 par) with mandatory retirement after 12 years

$  

What should be the prices of the following preferred stocks if comparable securities yield 10 percent? Round your answers to the nearest cent.

MN, Inc., $11 preferred ($110 par)

$  

CH, Inc., $11 preferred ($110 par) with mandatory retirement after 12 years

$  

Answer 1

1). yield = 8%

MN, Inc., $11 preferred ($110 par)

stock price for perpetuity is D/Yield = 11/0.08 = $137.50

CH Inc., $11 preferred ($110 par) with mandatory retirement after 12 years

Dividend = $11 for next 12 years,

and Par value of $110 will also be paid at year 12

So, Stock price today is sum of PV of dividends and par value discounted at yield

So, Price = D1/(1+Y) + D2/(1+Y)^2 + ... + D11/(1+Y)^11 + D12/(1+Y)^12 + Par/(1+Y)^12

So, price = 11(PVAIF 8I, 12N) + 110(PVIF 8I, 12N)

Price = 11*7.54 + 110* 0.397 = $126.58

2). yield = 10%

MN, Inc., $11 preferred ($110 par)

stock price for perpetuity is D/Yield = 11/0.10 = $110

CH Inc., $11 preferred ($110 par) with mandatory retirement after 12 years

Dividend = $11 for next 12 years,

and Par value of $110 will also be paid at year 12

So, Stock price today is sum of PV of dividends and par value discounted at yield

So, Price = D1/(1+Y) + D2/(1+Y)^2 + ... + D11/(1+Y)^11 + D12/(1+Y)^12 + Par/(1+Y)^12

So, price = 11(PVAIF 10I, 12N) + 110(PVIF 10I, 12N)

Price = 11*6.81 + 110* 0.3186 = $110