Factors Affecting the Market Prices of Preferred and Common Stocks
SciFi Labs is a publicly owned company with several issues of capital stock outstanding. Over the past decade, the company has consistently earned modest profits and has increased its common stock dividend annually by 5 or 10 cents per share. Recently the company has had several important research successes and has introduced several new products that you believe will motivate future sales and profits to increase dramatically. You also expect a gradual increase in long-term interest rates from their present level of about 8 percent to, perhaps, 9 percent or 10 percent.
Instructions
On the basis of these forecasts, explain whether you would expect to see the market prices of the following issues of SciFi capital stock increase or decrease. Explain your reasoning in each answer.
a. 10 percent, $100 par value preferred stock (currently selling at $80 per share).
b. $5 par value common stock (currently paying an annual dividend of $2.50 and selling at $40 per share).
c. 7 percent, $100 par value convertible preferred stock (currently selling at $95 per share).
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