Question

TXS Manufacturing has an outstanding preferred stock issue with a par value of ?$69

per share. The preferred shares pay dividends annually at a rate of

11%

a.??What is the annual dividend on TXS preferred? stock?

b.??If investors require a return of 4% on this stock and the next dividend is payable one year from? now, what is the price of TXS preferred? stock?

c.??Suppose that TXS has not paid dividends on its preferred shares in the last two years and is not expected to pay its current? dividend, but investors believe that it will start paying dividends again in one year. What is the value of TXS preferred stock if it is cumulative and if investors require? a(n) 4%

rate of? return?

Answer 1

Par value of preferred stock = $69

Dividend rate = 11%.

a.

Annual Dividend = $69 × 11%

= $7.59

Annual Dividend on preferred stock is $7.59.

b.

If investors require a return of 4% on this stock then

Current Price of stock = Annual Dividend / Required rate of return

= $7.59 / 4%

= $189.75

If investors require a return of 4% on this stock then current price of preferred stock is $189.75.

c.

if company pays cumulative dividend and comapny does not paid dividend in last 2 year but it is expected to pay dividend this year then

new price of preferred stock = $189.75 + (3 × $7.59)

= $189.75 + $22.77

= $212.52

New price of preferred stock is $212.52.