Question

Please show calculation methods

Preferred stock valuation TXS Manufacturing has an outstanding preferred stock issue with a par value of $65 per share. The preferred shares pay dividends annually at a rate of 10%. a. What is the annual dividend on TXS preferred stock? b. If investors require a return of 8% 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 an) 8% rate of return? a. The annual dividend on TXS preferred stock is $ . (Round to the nearest cent.) b. The price of TXS preferred stock is $ Round to the nearest cent.) C. The price of TXS preferred stock is $ . (Round to the nearest cent.)

Answer 1

a. The annual dividend is computed as shown below:

= $ 65 x 0.10

= $ 6.5

b. The price is computed as follows:

= Annual dividend / required rate of return

= $ 6.5 / 0.08

= $ 81.25

c. The price is computed as follows:

= ($ 6.5 x 2) / 1.08 + $ 81.25

= $ 93.29 Approximately

Feel free to ask in case of any query relating to this question