8. Valuing preferred stock

Companies that have preferred shareholders promise to pay a stated dividend for an infinite period. Preferred stock is treated like a perpetuity if the payments last forever. Preferred stocks are similar to bonds in some respects and to common stock in others. Companies can suspend the dividend paid to preferred shareholders without throwing the company into bankruptcy.

As with bonds, preferred shareholders receive a fixed dividend before earnings are paid out to common shareholders and, as with common stock, preferred shareholders can benefit from potential appreciation in the value of stock.

8.1) Atlantic Northern Inc. pays an annual dividend rate of 10.40% on its preferred stock that currently returns 13.94% and has a par value of $100.00. What is the value of Atlantic Northern Inc.s stock?

a) $100.00

b) $74.61

c) $111.91

d) $89.53

8.2) Suppose there is high unemployment, which causes interest rates to fall, which in turn pulls the preferred stocks yield to 8.36%; the new value of preferred stock will _____ .