Answer:
a. Annual dividend on TXS preferred stock is $6.12 per share.
b. The price of TXS preferred stock is $153 per share.
c. The value of TXS preferred stock if it is cumulative and if investors require a(n) 4% rate of return is $164.77 per share.
Explanation:
These can be calculated as follows:
a. What is the annual dividend on TXS preferred stock?
The formula for calculating the annual dividend on preferred stock is given as follows:
Annual dividend on preferred stock = Par value of preferred stock * annual dividend rate
Since we have the following for TXS:
Par value of preferred stock = $68 per share
Annual dividend rate = 9%
Therefore, we have:
Annual dividend on preferred stock = $68 * 9% = $6.12 per share
Therefore, annual dividend on TXS preferred stock is $6.12 per share.
b. If investors require a return of 4% on this stock and the next dividend is payable one year from now, what is the price of TXS preferred stock?
The formula for calculating the price of preferred stock is given as follows:
Price of preferred stock = Dividend per share / Preferred stock required rate of return
Since for TXS, we have
Dividend per share = $6.12 per share
Preferred stock required rate of return = 4%, or 0.04
Therefore, we have:
Price of preferred stock = $6.12 / 0.04 = $153 per share
Therefore, the price of TXS preferred stock is $153 per share.
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) 4% rate of return?
Cumulative preferred stock implies that unpaid previous dividends can be carried forward as arrears to when the dividend is paid.
Since TXS has not paid dividends on its cumulative preferred shares in the past two years, but will start paying dividends again in one year implies that preferred stockholders will receive the dividends in arrears of one year together with the next dividend payment.
Based on this, we have
TXS preferred stock value = PV of two dividends + Preferred stock price
PV of two dividends = Present value of two dividends in arrears to paid now = M / (1 + r)^n
Where,
M = 2 * Annual dividend on TXS preferred stock = 2 * $6.12 = $12.24
r = 4%, or 0.04
n = 1 year
Therefore, we have:
PV of two dividends = $12.24 / (1 + 0.04)^1 = $11.77
Since from part b. preferred stock price is $153 per share, we therefore have:
TXS preferred stock value = $11.77 + 153 = $164.77 per share
Therefore, the value of TXS preferred stock if it is cumulative and if investors require a(n) 4% rate of return is $164.77 per share.
