A share of preferred stock for the Buford Pusser Baseball Bat Company just sold for $100 and carries an $8 annual dividend.
Question:
A share of preferred stock for the Buford Pusser Baseball Bat Company just sold for $100 and carries an $8 annual dividend.
a. What is the yield on this stock?
b. Now assume that this stock has a call price of $110 in five years, when the company intends to call the issue.
Homework Answers
Answer:
a. kp = Dp/P0: $8/$100 = 8 percent
b. Solving for YTC by computer for the following equation
$100 = $8/(1 +YTC)1 + $8/(1 + YTC)2 + $8/(1 + YTC)3
+ $8/(1 + YTC)4 + $118/(1 + YTC)5
We get YTC = 9.64 percent. (If the students work with present-value tables, they should still be able to determine an approximation of the yield to call by making use of a trialand-error procedure.)
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