Question

Preferred stock valuation TXS Manufacturing has an outstanding preferred stock issue with a par value of $65 per share. The preferred shares pay dividends annually at a rate of 12%. a. What is the annual dividend on TXS preferred stock? b. If investors require a return of 8% on this stock and the next dividend is payable one year from now, what is the price of TXS preferred stock? c. Suppose that TXS has not paid dividends on its preferred shares in the past two years, but investors believe that it will start paying dividends again in one year. What is the value of TXS preferred stock if it is cumulative and if investors require a(n) 8% rate of return? a. The annual dividend on TXS preferred stock is $ . (Round to the nearest cent.)

Answer 1

1. Annual dividend on TXS preferred stock = Par value of preferred stock * annual dividend rate

Where,

Par value of preferred stock = $65

Annual Dividend rate = 12%

Therefore,

Annual dividend on TXS preferred stock = $65 * 12% = $7.80

2. Preferred stock price = (dividend per share/ required rate of return on preferred stock)

Where,

Dividend per share = $7.80 per share

Required rate of return on preferred stock = 8%

Therefore,

Preferred stock price = $7.80 / 8%

=$7.80/0.08 = $97.50 per share

3. The value of TXS preferred stock if it is cumulative

Dividends are not paid for two years; therefore investors will get it in arrears in one year with the next dividend payment as it is cumulative dividend

The value of TXS preferred stock = present value of two dividends + Preferred stock price

= (2 * 7.80)/ (1+8%) + $7.80 / 8%

= $14.44 +$97.50

= $111.94 per share