Question

TXS Manufacturing has an outstanding preferred stock issue with a par value of ​$67 per share. The preferred shares pay dividends annually at a rate of 11​%. a. What is the annual dividend on TXS preferred​ stock? b. If investors require a return of 5​% 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) 5​% rate of​ return?

Answer 1

Answer:

Given Data,

Par Value of preferred stock = $67

Annual dividend yield = 11%

Part A.

$Annual Dividend = Par Value of preferred stock * Annual dividend yield$

Annual Dividend = $67 × 11%

Annual Dividend = $7.37

Thus, the Annual Dividend on preferred stock is $7.37.

Part B.

Rate of return = 5%

$Price of preferred stock = Annual Dividend on preferred stock / Rate of return$

Price of preferred stock = $7.37 / 5%

Price of preferred stock = $147.4

Price of preferred stock is $147.4.

Part C.

Therefore the company hasn’t paid their dividend for last two year.

The cumulative dividend for last two year = $7.37 + $7.37

The cumulative dividend for last two year = $14.74

Thus,  

$Current Price of preferred stock = cumulative dividend for last two year + Price of preferred stock$

Current Price of preferred stock = $14.74 + $147.4

Current Price of preferred stock = $162.14

The Price of preferred stock after two year is $162.14.