A firm has the following preferred stocks outstanding: PFD A: $40 annual dividend, $1,000 par value, no maturity PFD B: $95 annual dividend, $1,000 par value, maturity after twenty-five years If comparable yields are 9 percent, what should be the price of each preferred stock?
What will be an ideal response?
Price of PFD A: $40/.09 = $444Price of PFD B: $95(9.823) + $1,000(.116) = $1,049?(9.823 is the interest factor for the present value of an annuity of $1 at 9 percent for twenty-five years, and .116 is the interest factor for the present value of $1 at 9 percent for twenty-five years.)?(PV = ?; N = 25; I = 9; PMT = 95; and FV = 1000. PV = 1049.)?Point out the inverse relationship between interest rates and changes in the prices of preferred stock. Stock A's price declined since the dividend yield (based on the par value) is 4 percent. Stock B's price rose, since its yield (based on the par value) is 9.5 percent.
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What will be an ideal response?