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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

PREFERRED STOCK VALUATION Earley Corporation issued perpetual preferred stock with an 8% annual dividend. The stock currently yields 7%, 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 9%. What is its new market value?

a.

Summary Introduction

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

Introduction:

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 does not have a maturity date and is available without any fixed tenure is called perpetual preferred stock.

Explanation

Given information:

Dividend is $8 (8% of par value $100).

Current yield is 7% or 0.07.

Formula to compute stock value,

Vp=Dprp

Where,

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

b.

Summary Introduction

To compute: The value of E Company’s stock if yield is increased to 9%.

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