[Maltza]

North Pole Cruise Lines issued preferred stock many years ago. It carries a fixed dividend of $6 per share. With the passage of time, yields have soared from the original 6 percent to 14 percent (yield is the same as required rate of return).

A. What was the original issue price?
B. What is the current value of this preferred stock?
C. If the yield on the Standard & Poor’s stock Index declines, how will the price of the preferred stock be affected?

[karism]

OMG I have right the same question you do.. I don't understand how to get it if we have the yied rate but not the interest rate... :S

[karism]

I found Shelly104 answered this before... here it is..

good luck :)

a. What was the original issue price? $5.66
Pp = Dp / (1 + Kp) 1
Pp = 6.00 / (1 + .06)1= 5.66
b. What is the current value of this preferred stock? $ 5.26
Pp = Dp / (1 + Kp) 1
Pp = 6.00 / (1 + .14) = 5.26
c. If the yield on the Standard & Poor�s preferred stock index declines, how will the
price of the preferred stock be affected?
The preferred stock price will increase

[highlighter]

I don't understand the formula used in the answer provided. I thought I was supposed to divide. $6/6%? If the original stock required a $6 dividend, how can the original price be $5.66? Clearly I am missing something, but have no idea what. I read the chapter again. But I keep coming to the same formula to just divide the dividend by the percentage.

Formula
Price of preferred stock=annual dividend for preferred stock dividend (a constant value)/required rate of return for, or discount rate, applied to preferred stock dividends

I was hoping to confirm my answers on this site with others who are working the same problems, but I am a bit lost, since discovering my answer is not even in the same ball park. Help please. :confused: