Companies that have preferred stock outstanding promise to pay a stated dividend for an infinite period. Preferredstock is treated like a perpetuity if the payments last forever. Preferred stocks are considered to be a hybrid of astock and a bond. For example, one of the major differences between preferred shares and bonds is that the issuingcompanies can suspend the payment of their preferred dividends without throwing the company into bankruptcy.However, similar to bonds, preferred stockholders receive a fixed payment-their dividend-before the company'sresidual earnings are paid out to its common stockholders and, as with common stock, preferred stockholders canbenefit from an appreciation in the value of the firm's stock securities.Consider the following case of Wellington Industries:Wellington Industries pays an annual dividend rate of 11.20% on its preferred stock that currently returns 15.01%and has a par value of $100.00 per share. What is the value of Wellington's preferred stock?O $100.00 per share$89.54 per shareO $111.93 per share$74.62 per shareSuppose that due to high inflation, interest rates rise and pull the preferred stock's yield to 19.51%. The value of thepreferred stock will

Calculate the value of preferred stock as follows:

Answered: Companies that have preferred stock…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter20: Hybrid Financing: Preferred Stock, Warrants, And Convertibles

Section: Chapter Questions

Problem 4P

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True or False An asset or stock with a beta less than 1.0 means the stock is more risky than the market in general. Bonds that have a callable feature allow the bond holder to convert their debt to common shares of stock. Bond holders have voting rights and common shareholders do not. Bond holders have first claim on assets in the event of a bankruptcy, so they are less risky than common stock. An ordinary annuity is preferred by investors because they receive their payment at the beginning of each period.
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 Has a par, or face, value. 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 $14 per share. If the investors pay $134.26 per share for their investment, then Tamin’s cost of preferred stock (rounded to four decimal places) will be (10.9489,…
In what way is a preferred stock usually more similar to a bond than to a common stock? O a. Preferred stockholders are more risky than common stocks O b. Preferred stockholders elect the board of directors of the organization O c. Preferred bondholders participate in the growth of the company through increases in dividends and stock prices O d. Preferred stockholders are typical entitled fixed payments O e. If the company were to go into liquidation, preferred stockholders will be entitled to payments after common stockholders are paid-off
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. No tax adjustments are made when calculating the cost of preferred stock. Consider the case of Turnbull Enterprises: At the present time, Turnbull Enterprises does not have any preferred stock outstanding but is looking to include preferred stock in its capital structure in the future. Turnbull has found some institutional investors that are willing to purchase its preferred stock issue provided that it pays a perpetual dividend of $13 per share. If the investors pay $100.15 per share for their investment, then Turnbull’s cost of preferred stock (rounded to four decimal places) will be .
Which of the following is FALSE regarding bonds? The yield to maturity is the return an investor would earn if she buys the bond at the current price and holds it to maturity, collecting all of the promised coupon payments and the par value at maturity bond holders vote to elect members to the board of directors a bond indenture includes all of the basic terms of a bond issue bondholders have legal recourse if a company fails to make the promised interest payments or the par value at maturity corporate bonds usually have a fixed coupon rate with semi-annual interest payments.
A firm’s preferred stock often sells at yields below its bonds because: Preferred stock generally carries a higher agency rating. Owners of preferred stock have a prior claim on the firm’s earnings. Owners of preferred stock have a prior claim on a firm’s assets in the event of liquidation. Corporations owning stock may exclude from income taxes most of the dividend income they receive. Which is the most risky transaction to undertake in the stock index option markets if the stock market is expected to increase substantially after the transaction is completed? Write a call option. Write a put option. Buy a call option. Buy a put option
Preference shares have characteristics similar to bonds because it ______________ A. has a fixed monthly rate. B. has a fixed dividend amount. C. represents the ownership of the company. D. has no fixed dividend amount.
Preferred stocks are characterized by all the following, except voting rights are generally not present and not given to the holders of these stocks the dividends declared for the investors of these stocks are tax deductible to the issuer warrants may be attached to these securities it may be convertible to ordinary or common stock Which of the following would best explain an increase in receivables turnover? The company adopted new credit policies last year and began offering credit to customers with weak credit histories. Due to problems with an error in its old credit scoring system, the company had accumulated a substantial amount of uncollectible accounts and wrote off a large amount of its receivables. To match the terms offered by its closest competitor, the company adopted new payment terms now requiring net payment within 30 days rather than 15 days, which had been its previous requirement.
Which of the following statements is most correct? The distinguishing feature between spot markets versus futures markets transactions is the maturity of the investments. That is, spot market transactions involve securities that have maturities of less than one year whereas futures markets transactions involve securities with maturities greater than one year. Capital market transactions only include preferred stock and common stock transactions. If General Electric were to issue new stock this year it would be considered a secondary market transaction since the company already has stock outstanding. D. None of the Statements is correct.
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 Usually has no voting rights. No tax adjustments are made when calculating the cost of preferred stock. 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 $12 per share. If the investors pay $98.90 per share for their investment, then Tamin’s cost of preferred stock (rounded to four decimal places) will be .
An investor that owns convertible bonds in a deteriorating company would realize a higher return on his/her investment by converting the bond immediately before bankruptcy. True or False.
It is not unusual to issue long-term debt in conjunction with an arrangement under which lenders receive an option to buy common stock during all or a portion of the time the debt is outstanding. Sometimes the vehicle is convertible bonds; sometimes warrants to buy stock accompany the bonds and are separable. Interstate Chemical is considering these options in conjunction with a planned debt issue.“You mean we have to report $7 million more in liabilities if we go with convertible bonds? Makes no sense to me,” your CFO said. “Both ways seem pretty much the same transaction. Explain it to me, will you?”1. The differences in accounting for proceeds from the issuance of convertible bonds and of debt instruments with separate warrants to purchase common stock. 2. The underlying rationale for the differences. 3. Arguments that could be presented for the alternative accounting treatment.

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