Companies that have preferred stockholders promise to pay a stated dividend for

Question

Companies that have preferred stockholders promise to pay a stated dividend for an infinite period. Preferred stock is treated like a perpetuity If the payments last forever. Preferred stocks are considered to be a hybrid of a stock and a bond. Companies can suspend the dividend paid to preferred stockholders without throwing the company into bankruptcy. As with bonds, preferred stockholders receive a fixed dividend before earnings are paid out to common stockholders and, as with common stock, preferred stockholders can benefit from potential appreciation in the value of stock. Uninode Inc. pays an annual dividend rate of 10.20% on its preferred stock that currently returns 13.67% and has a par value of $100.00. What is the value of Uninode Inc.'s stock? $89.54 $74.62 $111.92 $100.00 Suppose there Is high unemployment, which causes interest rates to fall, which in turn pulls the preferred stock's yield to 8.20%. The value of the preferred stock will .

Explanation / Answer

Price of preferred stock = Dp/r

Dp = Preferred dividend = 10.2

r = Required return on stock =13.67%

Value of Stock = 10.2/13.67%

=$74.62

If dividend is 8.2% then

Value of preferred stock = 8.2/13.67%

= $60

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