North Pole Cruise Lines issued preferred stock many years ago. It carries a fixe

Question

North Pole Cruise Lines issued preferred stock many years ago. It carries a fixed dividend of $11 per share. With the passage of time, yields have soared from the original 8 percent to 7 percent (yield is the same as required rate of return).
  
a. What was the original issue price? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
  

  
b. What is the current value of this preferred stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
  

c. Maxwell Communications paid a dividend of $1.20 last year. Over the next 12 months, the dividend is expected to grow at 9 percent, which is the constant growth rate for the firm (g). The new dividend after 12 months will represent D1. The required rate of return (Ke) is 14 percent.

  
Compute the price of the stock (P0). (Do not round intermediate calculations. Round your answer to 2 decimal places.)
  

Explanation / Answer

Dear Student Thank you for using Chegg Please find below the answer Statementshowing Computations Paticulars Amount Fixed Dividend                         11.00 a) Original rate 8% original issue price = 11/8%                       137.50 b) New yield 7% current value of this preferred stock = 11/7%                       157.14 c) P0 = D1/(ke-g) Where P0 is the price Ke is the required return 14.00% g is the growth rate 9.00% D1 is dividend at end of year=1.20*1.09 1.308 P0 = 1.308/(14% - 9%) P0 = 1.308/(5%) P0 = 26.16 Stock price = $26.16

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