Chapter 17, Problem 22P

a.

Summary Introduction

To determine: The likely price of the floating-rate preferred stock for Barnes Air Conditioning Inc.

Introduction:

Preferred stock:

It is a type of security that represents ownership of the company. The holders of such stock are entitled to receive a fixed dividend amount before it is paid to the common shareholders of the company.

Floating Rate:

It refers to a variable interest rate that fluctuates or changes over a period of time as per the market and may be difficult to predict in the near future.

b.

Summary Introduction

To calculate: The price of the straight preferred stock for Barnes Air Conditioning Inc.

Introduction:

Straight preferred stock:

It refers to those preferred stocks that cannot be converted into common stocks. It is also referred to as ‘non-cumulative’ because if dividend is not declared or paid up in time, the past dividends will never be received.

Cost of preferred stock:

It refers to the amount of dividend paid annually by a company on its preferred stock. Such dividend is not tax deductible and can be calculated by dividing the annual preferred dividend with the current market price of the preferred stock.