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. Big T Burgers and Fries Corp. pays an annual dividend rate of 11.20% on its preferred stock that currently returns 15.01% and has a par value of $100.00. What is the value of Big T Burgers and Fries Corp.'s stock? $89.54 $100.00 $74.62 $111.93 Suppose, due to high inflation, interest rates rise and pull the preferred stock's yield to 19.51%. The value of the preferred stock will decrease.

Explanation / Answer

Return on investment = (100*11.20%)/Value of stock

0.1501 = 11.20/X

X = 11.20/0.1501 i.e 74.62

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.