Question

Durango Water Works has an outstanding issue of preferred stock that has a par (maturity value) of $75.00. The stock, which pays a quarterly dividend of $1.10, will be retired by the firm in 20 years. If the preferred stock is currently selling for $68.00, what is the preferred stock’s yield-to-maturity? (Round off to the nearest 0.01%) 5.64% 7.73% 6.72% 4.28%

Answer 1

Answer:

6.64%

Explanation:

yield to maturity (YTM) = {preferred dividend + [(faced value - market value)/n]} / [(face value + market value)/2]

• preferred dividend = $1.10
• n = 20 x 4 = 80 quarters
• face value = $75
• market value = $68

yield to maturity (YTM) = {$1.10 + [($75 - $68)/80]} / [($75 + $68)/2]

yield to maturity (YTM) = $1.1875 / $71.50 = 0.0166 quarterly yield x 4 = 0.0664 = 6.64% annual yield