Question

Ten years ago, the Edson Water Company issued preferred stock at a price equal to the par value of $100. If the dividend yield on that issue was 12 percent, explain why the firm’s current cost of preferred capital is not likely to equal 12 percent.

Answer 1

Solution:-

At the time of Issue, The price of Preferred stock is $12 and dividend yield was 12%. So that Annual dividend on preferred stock was also $12.

As we also knows that and the same is given in question that required rate of return at the time of issue of preferred stock was also 12%.

If during the last 10 years, Required rate of return of Edson water company are change, then the current required rate of return will not be 12%.

This will change the price of preferred stock to some other amount other than $100.

If you have any query related to question then feel free to ask me in a comment. Thanks.