Question

Preferred stock is a hybrid security, because it has some characteristics typical of debt and others...

Preferred stock is a hybrid security, because it has some characteristics typical of debt and others typical of equity. The following table lists various characteristics of preferred stock. Determine which of these characteristics is consistent with debt and which is consistent with equity.

Characteristics

Debt

Equity
Dividends are fixed.
Failure to pay a preferred dividend does not send the firm into bankruptcy.

Consider the case of Tamin Enterprises:

At the present time, Tamin Enterprises does not have any preferred stock outstanding but is looking to include preferred stock in its capital structure in the future. Tamin has found some institutional investors that are willing to purchase its preferred stock issue provided that it pays a perpetual dividend of $11 per share. If the investors pay $97.95 per share for their investment, then Tamin’s cost of preferred stock (rounded to four decimal places) will be ??????

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1
Dividends are fixed is the characteristics of debt where fixed interest payment is made each year.
Failure to pay a preferred dividend does not send the firm into bankruptcy is the characteristics of equity where dividend payment is not fixed and even if dividend is not paid it does not lead to any kind of bankruptcy issue.
If interest is not paid on debt then there could be bankruptcy issue.
Cost of preferred stock Dividend/Price of preferred stock
Cost of preferred stock 11/97.95
Cost of preferred stock 0.1123
Cost of preferred stock 11.2300%
0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Preferred stock is often called a hybrid security because it has some characteristics that are typical...
Preferred stock is often called a hybrid security because it has some characteristics that are typical of debt and others that are typical of common equity. The following table lists several characteristics of preferred stock. Determine which of these characteristics are consistent with debt securities and which are consistent with common stock. Characteristic Debt Common stock Its dividends are fixed in amount. It has a par, or face, value. Consider the case of Blue Hamster Manufacturing: Blue Hamster Manufacturing pays...
QUESTION 45 Characteristics of preferred stock that indicate it is a hybrid security most likely include:...
QUESTION 45 Characteristics of preferred stock that indicate it is a hybrid security most likely include: Representation of ownership interest. Guaranteed dividend payments. Premiums attached to its par value. Payment of interest.
McKinsey and Sons has a target capital structure that calls for 50% debt, 10% preferred stock,...
McKinsey and Sons has a target capital structure that calls for 50% debt, 10% preferred stock, and 40% common equity. The firm can issue new 10 year debt with an annual coupon of 9% for $968.606. The firm is in a 35% tax bracket. The firm's preferred stock sells for $80 per share and pays a dividend of $10 per share; however, the firm will only net $77 per share on the sale of new preferred stock. The firm's common...
Preferred Stock is noted as a hybrid security as it has similar fixed payments to that...
Preferred Stock is noted as a hybrid security as it has similar fixed payments to that of debt but is still considered to be a form of equity. My questions surrounds the practical purchase of preferred stock as an investor and the issuance of preferred stock as a company. When is it practical or advantageous to purchase preferred stock as an investor? Furthermore, when is it practical to issue it as a company?
Preferred stock has characteristics of both debt and common stock. Which characteristics of preferred stock resemble...
Preferred stock has characteristics of both debt and common stock. Which characteristics of preferred stock resemble that of common stock? Group of answer choices Preferred and common dividends are not tax deductible expenses; preferred and common stock both carry voting rights Preferred and common stock both carry voting rights; preferred and common dividends are equally stable and are at management’s discretion Preferred and common stock are classified as a Liability on balance sheet; preferred and common dividends are not tax...
Hiland's optimal or target capital structure has the following weights: Debt 35%, Preferred Stock 15%, and...
Hiland's optimal or target capital structure has the following weights: Debt 35%, Preferred Stock 15%, and Common Stock 50%. The before tax cost of debt (or yield to maturity) is 7%. The firm's marginal tax rate is 40%. The firm has retained earnings as its primary source of common equity funding and has not incurred flotation costs. Its preferred stock if currently selling for $40 and pays a perpetual dividend of $4.00 per share. The firm is expected to grow...
Valuing preferred stock Companies that have preferred stock outstanding promise to pay a stated dividend for...
Valuing preferred stock Companies that have preferred stock outstanding promise to pay a stated dividend for an infinite period. Preferred stock is treated like a perpetuity if the payments last forever. Preferred stocks are considered to be a hybrid of a stock and a bond. For example, one of the major differences between preferred shares and bonds is that the issuing companies can suspend the payment of their preferred dividends without throwing the company into bankruptcy. However, similar to bonds,...
(a) Company A has issued perpetual preferred stock with a par value of $100. The stock...
(a) Company A has issued perpetual preferred stock with a par value of $100. The stock pays an annual dividend of $6 and its current price is $60. (i) What is the dividend yield of Company A’s preferred stock? (ii) What is the total return of holding Company A’s preferred stock for year 1?   (b) Company B has just paid a dividend of $2.45 per share. The company will increase its dividend by 20% next year and then reduce its...
) LEI has the following capital structure, which it considers to be optimal: Debt 25% Preferred...
) LEI has the following capital structure, which it considers to be optimal: Debt 25% Preferred stock 15% Common equity 60 % 100 % LEI’s tax rate is 40% and investors expect earnings and dividends to grow at a constant rate of 9% in the future. LEI paid a dividend of $3.60 per share last year, and its stock currently sells at a price of $54 per share. LEI can obtain new capital in the following ways: Preferred: New preferred...
Curro Holdings Ltd has a target capital structure that calls for 25% debt, 25% preferred stock,...
Curro Holdings Ltd has a target capital structure that calls for 25% debt, 25% preferred stock, 50% common equity. The firm's before-tax cost of debt is 8.34%, the tax rate 40% and it can sell as much debt as it wishes at this rate. The firm's prefered stock currently sells for R80 per share and pays a perpetual dividend of R2.9. The firm will, however only net R68 per share from the sale of new preferred stock. It's common share...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT