Question

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

​$6060

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

1111​%.

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

b.  If investors require a return of

88​%

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 past two​ years, 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)

88​%

rate of​ return?

Answer 1

a) Annual dividend = face value x rate of dividned

= 6060 x 1111%

=$ 67326.60

b) Required rate of return = Dividned/Price of TXS preference stock

=88% = 67326.60/Price of TXS preference stock

=Price of TXS preference stock = 67326.60/88%

=76507.50 $

c) Here dividends were not paid for 2 years, hence they will be accumulated and will be paid togather

Thus next year dividend amount would be

=67326.60 + (67326.60 x 2)

=67326.60 + 134653.20

=201979.80$

Thus Price of TXS preference stock = 201979.80/88%

=229522.50 $