1. Problem 14-01
|
eBookeBookProblem 14-01
Big Oil, Inc. has a preferred stock outstanding that pays a $9 annual dividend. If investors’ required rate of return is 10 percent, what is the market value of the shares? Round your answer to the nearest cent. $ If the required return declines to 5 percent, what is the change in the price of the stock? Round your answer to the nearest cent. The price |
Hide Feedback
| Solution |
| Price of the perpetual preferred stock = Preferred dividends/Required return
At 10%: $9/0.10 = $90.00 At 5%: $9/0.05 = $180.00 The price increases by $180.00 – $90.00 = $90.00. |
Big Oil, Inc. has a preferred stock outstanding that pays a $9 annual dividend. If investors’ required rate of return is 10 percent, what is the market value of the shares? Round your answer to the nearest cent.
$
If the required return declines to 5 percent, what is the change in the price of the stock? Round your answer to the nearest cent.
The price by $ .
2. Problem 14-02
|
eBookeBookProblem 14-02
What should be the prices of the following preferred stocks if comparable securities yield 3 percent? Use Appendix B and Appendix D to answer the questions. Round your answers to the nearest cent.
$
$ |
Hide Feedback
| Solution | ||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||
What should be the prices of the following preferred stocks if comparable securities yield 3 percent? Use Appendix B and Appendix D to answer the questions. Round your answers to the nearest cent.
-
- MN, Inc., $5 preferred ($100 par)
$
-
- CH, Inc., $5 preferred ($100 par) with mandatory retirement after 18 years
$ 
3. Problem 14-03
|
eBookeBookProblem 14-03
What should be the prices of the following preferred stocks if comparable securities yield 2 percent? Use Appendix B and Appendix D to answer the questions. Round your answers to the nearest cent. MN, Inc., $6 preferred ($130 par) $ CH, Inc., $6 preferred ($130 par) with mandatory retirement after 6 years $ What should be the prices of the following preferred stocks if comparable securities yield 6 percent? Round your answers to the nearest cent. MN, Inc., $6 preferred ($130 par) $ CH, Inc., $6 preferred ($130 par) with mandatory retirement after 6 years $ In which case did the price of the stock change? As with the valuation of bonds, an increase in interest rates causes the value of preferred stock to In which case was the price more volatile? While the prices of both preferred stocks |
Hide Feedback
| Solution | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
As with the valuation of bonds, an increase in interest rates causes the value of preferred stock to fall. While the prices of both preferred stocks declined, the price of the perpetual preferred stock declined more. |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
What should be the prices of the following preferred stocks if comparable securities yield 2 percent? Use Appendix B and Appendix D to answer the questions. Round your answers to the nearest cent.
MN, Inc., $6 preferred ($130 par)
$
CH, Inc., $6 preferred ($130 par) with mandatory retirement after 6 years
$
What should be the prices of the following preferred stocks if comparable securities yield 6 percent? Round your answers to the nearest cent.
MN, Inc., $6 preferred ($130 par)
$
CH, Inc., $6 preferred ($130 par) with mandatory retirement after 6 years
$
In which case did the price of the stock change?
As with the valuation of bonds, an increase in interest rates causes the value of preferred stock to .
In which case was the price more volatile?
While the prices of both preferred stocks , the price of the was more volatile.
4. Problem 14-04
|
eBookeBookProblem 14-04
You are considering purchasing the preferred stock of a firm but are concerned about its capacity to pay the dividend. To help allay that fear, you compute the times-preferred-dividend-earned ratio for the past three years from the following data taken from the firm’s financial statements:
Round your answers to two decimal places. 20X1: 20X2: 20X3: What does your analysis indicate about the firm’s capacity to pay preferred stock dividends? Times preferred dividend earned has |
Hide Feedback
| Solution |
| Net earnings = Operating income – Interest – Taxes
20X1: $20,000,000 – $4,400,000 – $6,000,000 = $9,600,000 20X2: $20,000,000 – $8,500,000 – $4,200,000 = $7,300,000 20X3: $19,000,000 – $9,200,000 – $5,200,000 = $4,600,000 Times dividend earned = Earnings/Preferred dividends 20X1: $9,600,000/$1,300,000 = 7.38 20X2: $7,300,000/$1,000,000 = 7.30 20X3: $4,600,000/$900,000 = 5.11 Times preferred dividend earned has declined each year, which indicates the firm’s capacity to pay the dividend has diminished. (However, the firm pays the dividend with cash and may continue to pay the dividend even if it is not earned.) |
You are considering purchasing the preferred stock of a firm but are concerned about its capacity to pay the dividend. To help allay that fear, you compute the times-preferred-dividend-earned ratio for the past three years from the following data taken from the firm’s financial statements:
| Year | 20X1 | 20X2 | 20X3 | |||
| Operating income | $ | 20,000,000 | $ | 20,000,000 | $ | 19,000,000 |
| Interest | 4,400,000 | 8,500,000 | 9,200,000 | |||
| Taxes | 6,000,000 | 4,200,000 | 5,200,000 | |||
| Preferred dividends | 1,300,000 | 1,000,000 | 900,000 | |||
| Common dividends | 1,600,000 | 1,700,000 | — |
Round your answers to two decimal places.
20X1:
20X2:
20X3:
What does your analysis indicate about the firm’s capacity to pay preferred stock dividends?
Times preferred dividend earned has each year, which indicates the firm’s capacity to pay the dividend has .