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Earley Corporation issued perpetual preferred stock with a 12% annual dividend. The stock currently yields 9%,...

Earley Corporation issued perpetual preferred stock with a 12% annual dividend. The stock currently yields 9%, and its par value is $100.

What is the stock's value? Round your answer to two decimal places.
$

Suppose interest rates rise and pull the preferred stock's yield up to 15%. What is its new market value? Round your answer to two decimal places.
$

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Answer #1

Earley Corporation issued perpetual preferred stock with a 12% annual dividend. The stock currently yields 9%, and its par value is $100.

annual dividend= 12% of $100 = $12

current yield = 9% = 0.09

Stock value = annual dividend/ current yield

= $12/0.09

= $133.33

Suppose interest rates rise and pull the preferred stock's yield up to 15%

new market value of stock = $12/0.15 = $80.

Hence, the market value falls to $80 with the rise in stocks yield from 9% to 15%

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