Chapter 14 Homework: FI210
1. XYZ Company had preferred stock outstanding that pays $7 annual dividend. If investors’
required rate of return is 12%
a. What is the market value of the shares? ___________________
b. If the required return declines to 10%, what is the change in the price of the stock?
Stock Price: ________________ Change in Stock Price: ______________
2. What would the prices of the following preferred stock if comparable securities yield 6%?
a. $5 preferred ($100 par) _____________________
b. $5 preferred ($100 par) with a mandatory retirement after 20 years ___________
3. You are considering purchasing the preferred stock of a firm but are concerned about its
capacity to pay the dividend. Compute the times-preferred-dividend-earned ratio for the years
2011, 2012, and 2013 from the following information in thousands of dollars:
2011 ratio: __________________
2012 ratio: __________________
2013 ratio: __________________
Year 2011 2012 2013
Operating Income 10,000 12,000 15,000
Interest 3,000 5,000 10,000
Taxes 4,000 5,000 4,000
Preferred Dividends 1,000 1,100 1,200
Common Dividends 3,000 2,000 2,000
Net Income 3,000 2,000 1,000
4. A $100 preferred stock pays an annual dividend of $4. Currently, the yield on comparable
preferred stock is 6%. What should be the price of this stock?
___________________________
5. A preferred stock with a maturity date of 10 years has the face value of $100 and an annual
dividend of $3.
a. What should be the price of this stock if the comparable yield was 4%? ____________
b. What would be the price of this stock if the comparable yield was 6%? ____________