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10. Preferred stock Preferred stock is often called a hybrid security because it has some characteristics that are typical of debt and others that are
10. Preferred stock Preferred stock is often called a hybrid security because it has some characteristics that are typical of debt and others that are typical of common equity. The following table lists several characteristics of preferred stock. Determine which of these characteristics are consistent with debt securities and which are consistent with common stock. Characteristic Debt Common stock Some issues have a stated maturity date Failure to pay its dividend does not send the firm into bankruptcy. Consider the case of Cute Camel Woodcraft Company: Cute Camel Woodcraft Company pays an annual dividend rate of 18.60% on its preferred stock that currently returns 24.92% and has a par value of $100.00 per share. The preferred stock issue does not mature, and computes its annual dividend as the product of its dividend rate and its par value. What is the current market value of Cute Camel's preferred stock? O $80.61 per share O $103.00 per share $65.68 per share O $74.64 per share Suppose that there is high unemployment, which causes interest rates to fall, which in turn pulls the preferred dividend yield to 21.43%. Then the value of Cute Camel's preferred stock will This is because interest rates (and security returns) and security values are related. to
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