Question

Problem 14-02

What should be the prices of the following preferred stocks if comparable securities yield 6 percent? Use Appendix B and Appendix D to answer the questions. Round your answers to the nearest cent.

1. MN, Inc., $7 preferred ($120 par)
2. CH, Inc., $7 preferred ($120 par) with mandatory retirement after 8 years

Answer 1

yield = 6%

MN, Inc., $7 preferred ($120 par)

stock price for perpetuity is D/Yield = 7/0.06 = $116.67

CH Inc., $7 preferred ($120 par) with mandatory retirement after 8 years

Dividend = $7 for next 8 years,

and Par value of $120 will also be paid at year 8

So, Stock price today is sum of PV of dividends and par value discounted at yield

So, Price = D1/(1+Y) + D2/(1+Y)^2 + ... + D7/(1+Y)^7 + D8/(1+Y)^8 + Par/(1+Y)^8

So, price = 7(PVAIF 6I, 8N) + 120(PVIF 6I, 8N)

Price = 7*6.21 + 120* 0.627 = $118.76