stocks 12

12. Valuing preferred stock Companies that have preferred stock outstanding promise to pay a stated dividend for an infinite period. Preferred stock is treated like a perpetwity if the payments last forever. Preferred stocks are considered to be a hybrid of a common stock and a bond. For example, one of the major differences between preferred shares and bonds is that the issuing companies can suspend the payment of their preferred dividends without throwing the company into bankruptcy. Rowever, simhar to bonds, preferred stockholders receive a fixed payment-their dividend-before the company's residual earnings are paid out to its common stockholders and, as with common stock, preferred stockholders can benefit from an appredation in the value of the firm's stock Aecurites. Conslder the following case of Acme Manufacturing Corporation: Ncme Manufacturing Copporation pays an annual dividend rate of 11.20% on its preferred sock that currenty returns 15.01% and has a par value of $100.00 per shave. What is the value of Acme's preferred stock? $111.93 per ihave $100.00 pir thare $74.62 per share t09.54 per share Suppote that there is high unemployment, which causes interest rates to fall, which in turn polls the preferred stock's yeld to 9.01%. The yalue of the preferted stock will