TXS Manufacturing has an outstanding preferred stock issue with a par value of $
ID: 2572339 • Letter: T
Question
TXS Manufacturing has an outstanding preferred stock issue with a par value of
$65
per share. The preferred shares pay dividends annually at a rate of
10%.
a.What is the annual dividend on TXS preferred stock?
b.If investors require a return of
8%
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 last two years and is not expected to pay its current dividend, 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)
8%
rate of return?
a. The annual dividend on TXS preferred stock is
$nothing .
(Round to the nearest cent.)b.The price of TXS preferred stock is
$nothing .
(Round to the nearest cent.)c.The price of TXS preferred stock is
$nothing .
(Round to the nearest cent.)
Explanation / Answer
Answer a.
Par Value of Preferred Stock = $65
Annual dividend rate = 10%
Annual Dividend = Par Value of Preferred Stock * Annual dividend rate
Annual Dividend = $65 * 10%
Annual Dividend = $6.50
So, annual dividend on TXS preferred stock is $6.50
Answer b.
Annual Dividend = $6.50
Required return = 8%
Price of Preferred Stock = Annual Dividend / Required return
Price of Preferred Stock = $6.50 / 0.08
Price of Preferred Stock = $81.25
So, price of TXS preferred stock is $81.25
Answer c.
TXS preferred stock is cumulative preferred stock and company has not paid any dividend in last 2 years.
So, Company will pay dividend for 3 years at the end of this year.
Price of preferred stock = $6.50 / 1.08 + $6.50 / 1.08 + $6.50 / 0.08
Price of Preferred Stock = $93.29
So, price of TXS preferred stock is $93.29
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