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26- A firm has the following preferred stocks outstanding:       PFD A: $40 annual dividend, $1,000...

26- A firm has the following preferred stocks outstanding:

     

PFD A: $40 annual dividend, $1,000 par value, no maturity

PFD B: $95 annual dividend, $1,000 par value, maturity after twenty-five years

If comparable yields are 9 percent, what should be the price of each preferred stock?

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Answer #1

Answer : Calculation of Price of PFD A

Since the preferred stock has no maturity therefore dividend will be received till perpetuity

Price = Annual Dividend / Yield Rate.

= 40 / 0.09

= 444.44

Calculation of Price of PFD B

Price = (Annual Dividend * PVAF @ yield for n years ) + (Par Value * PVF @ yield for nth year)

= (95 * PVAF @ 9% for 25 years) + (Par Value * PVF @ 9% for 25th year)

= (95 * 9.82257960421) + (1000 * 0.11596783551)

= 933.145 + 115.96783551

= 1049.11

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