Question

ljoul TiolewBrR Assignment -Last Name, First Name, Student ID Number, Course, Homework Number. Also, please staple before turning it in. Natal Corp. has issued some $100 par preferred stock with a dividend of 10% of par value. The required rate of return on the preferred stock is 9%. a) Compute the current value of the preferred stock. b) If the preferred stock sells in the market at S115 per share, what is the expected rate of return from the preferred stock. If Natal announces that it will redeem the preferred stock in 4 years at a redemption price of $140 per share, compute the rate of return from the preferred stock. c)

Answer 1

Solution A
Face Value	100
Dividend	10%
Preferred dividend	10
Required return	9%
Price=	10/9%	111.11
Solution B
Share price	115
Dividend	10
Expected return	=10/115	8.70%
Solution C
Year	Project A		PV factor @ 15%	PV Project A	PV factor @20%	PV Project A
0	(100)		1.000	(100)	1.000	(100)
1	10		0.870	9	0.833	8
2	10		0.756	8	0.694	7
3	10		0.658	7	0.579	6
4	10		0.572	6	0.482	5
4	140		0.572	80	0.482	68
			NPV	9		(7)
IRR	=Lower rate + Difference in rates*(NPV at lower rate)/(Lower rate NPV-Higher rate NPV)
	=15%+5%*(9/(9+7)
	17.81%