Question

North Pole Cruise Lines issued preferred stock many years ago. It carries a fixed dividend of $9 per share. With the passage of time, yields have soared from the original 10 percent to 7 percent (yield is the same as required rate of return).

a. What was the original issue price? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. What is the current value of this preferred stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

c. If the yield on the Standard & Poor’s Preferred Stock Index declines, how will the price of the preferred stock be affected?

The price of preferred stock will increase.

The price of preferred stock will decrease.

Answer #1

**Yield of a
preferred stock = Annual dividend/Price of Preferred
Stock**

a) Original Issue price

Yield at issuance 10%, annual dividend = $9

10% = 9/Price of Preferred Stock

Price of preferred Stock = 9/10% = **$90**

b) Current Value of preferred stock

Yield = 7%, preferred dividend = $9

7% = 9/Price of Preferred Stock

Price of preferred Stock = 9/7% = **$128.57**

**c)** If the
yield on the Standard & Poor’s Preferred Stock Index declines,
how will the price of the preferred stock be affected -
**The price of
preferred stock will increase**

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