~ Companies that have preferred stock outstanding promise to pay a stated divide

ID: 2821945 • Letter: #

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 similar to bonds in some respects

and to common stock in others. 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 Acme Manufacturing Corporation:

Acme Manufacturing Corporation pays an annual dividend rate of 8.80% on its preferred stock that currently returns

11.79% and has a par value of $100.00 per share. What is the value of Acme's preferred stock?

$100.00 per share

$111.96 per share

$89.57 per share

$74.64 per share

Suppose that there is high unemployment, which causes interest rates to fall, which in turn pulls the preferred stock's

yield to 7.07%. The value of the preferred stock will ________________.

What is the value of Acme's preferred stock

=annual dividend/return

=(100*8.8%)/11.79%

=74.64

The value of the preferred stock will=(100*8.8%)/7.07%

=124.47

the above is answer..

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