Question

PREFERRED STOCK VALUATION

Earley Corporation issued perpetual preferred stock with a 11% annual dividend. The stock currently yields 10%, 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 11%. What is its new market value? Round your answer to two decimal places.
$

Answer 1

A perpetual preferred stock is the stock that has no maturity and no specific buyback period. It pays fixed dividend to preference shareholders unless redeemed.

Now, dividend paid every year is 11% of 100= $11

It's current yield is 10%, stock value means market price of the stock.

Yield= dividend/ stock value

0.1= 11/stock value

Stock value= 11/0.1= $110

Now, yield rose to 11%

So, 0.11= 11/new market price

New market price= 11/.11 = $100.

Hence, as the interest rate increases, it affected in drop of share price back to it's par value