Madison is considering the purchase of 1,000 shares of the preferred stock of Sa

Question

Madison is considering the purchase of 1,000 shares of the preferred stock of Sanger Machine Company. The stock carries a par value of $100 per share and an annual dividend rate of 4.75%. Alternative investments of comparable risk are generating yields of 6.75%. What is the per-share value of Sanger's preferred stock?

Unfortunately, Madison has to postpone her purchase of Sanger's preferred shares for just over seven months. By the time she is ready to invest, the return on alternative investments of comparable risk has increased. She should expect the cost of her investment in Sanger's preferred shares to be __________________. (Less Expensive or More Expensive) Please Explain Why.

Assume that by the time Madison is ready to make her 1,000-shrae investment in Sanger, the market price of Sanger's preferred stock has changed to $95.00 per share. If she pays this price to acquire each share of Sanger's preferred stock, what rate of return would Madison earn on her investment? Remember that the shares have a par value of $100 and a dividend rate of $4.75%.

Explanation / Answer

A) per share value = 4.75/0.0675 = 70.37

B) less expensive because now he is reciveing extra money gor intial 7 months investment so prefered share value = 70.37/ (1+ 0.0675)^7 = 44.56

C0) r = 4.75/95 = 5%

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