Companies that have preferred stock outstanding promise to pay a stated dividend

Question

Companies that have preferred stock outstanding 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. For example, one of the major differences between preferred shares and bonds is that the issuing companies can suspend the payment of their preferred dividends without throwing the company into bankruptcy However, similar to bonds, preferred stockholders receive a fixed payment-their dividend-before the company's residual earnings are paid out to its common stockholders and, as with common stock, preferred stockholders can benefit from an appreciation in the value of the firm's stock securities Consider the following case of National Petroleum Refiners Corporation (NPR): National Petroleum Refiners Corporation (NPR) pays an annual dividend rate of 11.60% on its preferred stock that currently returns 15.54% and has a par value of $100.00 per share. what is the value of NPR's preferred stock? O $111.97 per share O $74.65 per share O $89.58 per share $100.00 per share Suppose that due to high inflation, interest rates rise and pull the preferred stock's yield to 20.20%. The value of the preferred stock will

Explanation / Answer

Annual dividend=(100*11.6%)=$11.6

1.Current value=Annual dividend/current rate of return

=(11.6/0.1554)=$74.65/share(Approx)

2.Value of share=(11.6/0.202)=$57.43(Approx)

Hence value of preferred stock will fall.

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