Asked by Yinka
Alpha Corporation has outstanding an issue of preferred stock with a par value of $100. It pays an annual dividend equal to 8 percent of par value. If the required return on Alpha’s preferred stock is 6 percent, and if Alpha pays its next dividend in one year, what is the market price of the preferred stock today? Explain why the price would change, if the required rate increased to 10 percent.
Answers
Answered by
NAINIAVI@GMAIL
Par value of preferred stock = $100
Annual dividend DP = 8% of $100 = $8
Required rate of return KP = 6%
Market price of preferred stock= DP / KP
= $8 / 0.06
= $133.33
Required rate of return KP = 10%
Market price of preferred stock= $8 / 0.10
= $80
There is inverse relationship between required rate of return and price, so when the required rate increased from 6% to 10%, price of the preferred stock decreased from $133 to $80.
Annual dividend DP = 8% of $100 = $8
Required rate of return KP = 6%
Market price of preferred stock= DP / KP
= $8 / 0.06
= $133.33
Required rate of return KP = 10%
Market price of preferred stock= $8 / 0.10
= $80
There is inverse relationship between required rate of return and price, so when the required rate increased from 6% to 10%, price of the preferred stock decreased from $133 to $80.
There are no AI answers yet. The ability to request AI answers is coming soon!
Submit Your Answer
We prioritize human answers over AI answers.
If you are human, and you can answer this question, please submit your answer.