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 Kahuna Burger Inc. pays an annual dividend rate of 8.60% on its preferred stock that currently returns 11.52% and has a par value of $100.00. What is the value of Big Kahuna Burger Inc.'s stock? $89.58 $74.65 $100.00 $111.98 Suppose, due to high inflation, interest rates rise and pull the preferred stock's yield to 14.98%. The value of the preferred stock will decrease increase

Explanation / Answer

Market value of the preferred stock = Preferred dividend per share / return

= ($100 *8.60%) / 11.52%

= $74.65

Therefore, the answer is $74.65.

Due to increase of preferred stock yield to 14.98%, the value of preferred stock reduced to $57.41 computed as follows.

= ($100 *8.60%) / 14.98%

= $57.41

The market value of preferred stock would decrease.

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