Preferred Stock Valuation: TXS Manufacturing has an outstanding preferred stock
ID: 2714677 • Letter: P
Question
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 with 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 1 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 last 2 years, but investors believe that it will start paying dividends again in 1 year. What is the value of TXS preferred stock if it is cumulative and if investors require an 8% rate of return.
Explanation / Answer
A) Annual dividend = par value *rate
= 65 * .10
= $ 6.5 per share
B) price of preferred stock today = D1 /rate
= 6.5 /.08
=$ 81.25 per share
C) price = Dividend to be paid next year / rate
= (6.5 * 3 ) /.08
= 19.5/ .08
= $ 243.75 per share