Question

Several years ago, Rolen Riders issued preferred stock with a stated annual dividend of 8% of its $100 par value. Preferred stock of this type currently yields 8%. Assume dividends are paid annually.

What is the estimated value of Rolen's preferred stock? Round your answer to the nearest cent.
$

Suppose interest rate levels have risen to the point where the preferred stock now yields 11%. What would be the new estimated value of Rolen's preferred stock? Round your answer to the nearest cent.

Answer 1

EStimated Value of Preferred Stock.

Preferred Stock Price= dividend Rate / requried rate of return

In this case Preferred Stock Price = $ 100

dividend Rate = 8%

  requried rate of return = 8%

So in this case the value of Preferred Stock will remain Par only because the Diveiden rate and Required Rate is same it will not incrase or Decrase the vale of Preferred Stock.

If the Required Rate of Return will became 11% p.a.

then Preferred Stock Price = dividend Rate / requried rate of return

$100 = 8% / 11%

$100 = 0.7273

Preferred Stock Price = $ 100/0.7273

=$ 72.72/-

New Estimated value of Rolen's preferred stock if yields 11%. is $ 72.72/-