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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

PREFERRED STOCK VALUATION Ezzell Corporation issued perpetual preferred stock with a 10% annual dividend. The stock currently yields 8%, and its par value is $100.

  1. a. What is the stock’s value?
  2. b. Suppose interest rates rise and pull the preferred stock’s yield up to 12%. What is its new market value?

a.

Summary Introduction

To compute: The value of E Company’s stock.

Perpetual Preferred Stock:

Perpetual preferred stock is a financial instrument for long term financial assistance required by the companies. A category of preferred stock that doesn’t have a maturity date and is available without any fixed tenure is called perpetual preferred stock.

Explanation

Given,

Dividend is $10 (10% of par value $100).

Current yield is 8%.

Formula to compute stock value,

Vp=Dprp

Where,

  • Dp is annual dividend on preferred stock.
  • Vp is current market price of preferred stock

b.

Summary Introduction

To compute: The value of E Company’s stock if yield is increased to 12%.

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