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 9 percent to 6 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.) Original issue price b. What is the current value of this preferred stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Current value c. If the yield on the Standard & Poor's Preferred Stock Index declines, how will the price of the preferred stock be affected? The price of preferred stock will increase. The price of preferred stock will decrease.

Explanation / Answer

Solution: a. Original issue price $122.22 Working Notes: Original issue price = D (Dividend Per Share)/Kp (Required rate of return) Original issue price = $11/9% Original issue price = $122.22 b. Current value $183.33 Working Notes: Current value= D (Dividend Per Share)/ new Kp (Required rate of return) Current value = $11/6% Current value = $183.33 c. Answer is 1st The price of preferred stock will increase. Working Notes: as yield declines from 9% to 6% , its price increases from $122.22 to $183.33 Price of preferred stock is inversely related to yield , as yields declines prices will increases. Please feel free to ask if anything about above solution in comment section of the question.

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