Homework SourseBarnes Air Conditioning Inc has two classes of preferred sto
Barnes Air Conditioning Inc. has two classes of preferred stock: floating rate preferred stock and straight (normal) preferred stock. Both issues have a par value of $100. The floating-rate preferred stock pays an annual dividend yield of 7 percent, and the straight preferred stock pays 8 percent. Since the issuance of the two securities, interest rates have gone up by 1.80 percent for each issue. Both securities will pay their year-end dividend today.
What is the price of the floating-rate preferred stock most likely to be? (Do not round intermediate calculations and round your answer to 2 decimal places.)
What is the price of the straight preferred stock likely to be? (Do not round intermediate calculations and round your answer to 2 decimal places.)
| Barnes Air Conditioning Inc. has two classes of preferred stock: floating rate preferred stock and straight (normal) preferred stock. Both issues have a par value of $100. The floating-rate preferred stock pays an annual dividend yield of 7 percent, and the straight preferred stock pays 8 percent. Since the issuance of the two securities, interest rates have gone up by 1.80 percent for each issue. Both securities will pay their year-end dividend today. |
Solution
a : FLOATING RATE PREFERRED STOCK WILL ADJUST THE RATES AND NOT THE PRICE. SO THE PRICE WILL BE $100 OR VERY NEAR TO IT.
PRICE = $100
b : THE PRICE OF STRAIGHT PREFERRED STOCK = DIVIDEND/ CURRENT YIELD = (100 X 8%) /9.8% = $81.63
PRICE = $81.63
