Question

Earley Corporation issued perpetual preferred stock with a 10% annual dividend. The stock currently yields 8%, and its par value is $100. Round your answers to the nearest cent. What is the stock's value? $______
Suppose interest rates rise and pull the preferred stock's yield up to 13%. What is its new market value? $______

Answer 1

Answer:

Explanation:

The value of the preferred stock would be

= Annual dividend ÷ annual yield

= $100 × 10% ÷ 8%

= $10 ÷ 8%

= $125 per share

And, the new market value would be

= Annual dividend ÷  annual yield

= $10 ÷ 13%

= $76.92 per share

For computing the stock value or market value we simply divide the annual dividend by the annual yield