TXS Manufacturing has an outstanding preferred stock issue with a par value of $
ID: 2791025 • Letter: T
Question
TXS Manufacturing has an outstanding preferred stock issue with a par value of $64 per share. The preferred shares pay dividends annually at a rate of 9%.
a.What is the annual dividend on TXS preferred stock?
b.If investors require a return of 5% on this stock and the next dividend is payable one year fromnow, what is the price of TXS preferred stock?
c.Suppose that TXS has not paid dividends on its preferred shares in the last two years and is not expected to pay its current dividend, but investors believe that it will start paying dividends again in one year. What is the value of TXS preferred stock if it is cumulative and if investors require a(n) 5% rate of return?
Explanation / Answer
a. annual dividend = 9% of 64 = 5.76
b. price of the stock = 5.76/0.05 = 115.20
c. price along with two cumulative dividends = 115.20 + 5.76*2/1.05 = 126.17
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