Questions:

$1.$ what is the required rate of return for the preferred stock? how does this rate compare to the YTM for the $91/8$ percent bond? is this difference what you would have expected from a risk$/$return standpoint? why or why not?

$2.$ what would be the value of the $91/8$ percent coupon bond if the time to maturity was $10$ years rather than $26$ years.? Explain the answer.

YTM should be $9\mathrm{.}88\%$ and TYC should be $11\mathrm{.}02\%$ for the $26$ years to maturity $91/8$ percent coupon bond.

Long$-$Term Debt:

The company has a capital structure that is made up of $34$ percent long$-$term debt, $3$ percent preferred stock, and $63$ percent common stock. One of the two largest domestic long$-$term debt issues is a $9\frac{1}{8}$ percent coupon bond that is due in $26$ years. This debenture is currently selling for $$930.$ The bond is callable in seven years and if called will be redeemed at a premium of $104\mathrm{.}4375.$ The other large publicly held bond is a $9$ percent coupon bond that is due in nine years. This debenture is selling for $$972\mathrm{.}50.$ Both of these bonds are rated $A$ by Moody's.

Preferred Stock:

The preferred stock is a $$2\mathrm{.}75$ cumulative preferred with a stated value of

$$30\mathrm{.}50,$ but it is currently selling for $$30.$ More than $5\mathrm{.}5$ million shares were

issued in February $1979$ in connection with the merger of FDS Holding

Company into a subsidiary of HPI. The preferred stock has no voting rights

unless the company is in arrears on six or more quarterly dividends, and then

each shareholder is entitled to one$-$quarter vote per share. In the event of liquidation each share is entitled to $$30\mathrm{.}50$ plus accrued dividends