North Pole Cruise Lines 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 Preferred Stock Index declines, how will the price of the preferred stock be affected?
a) Original issue price = Fixed Dividend / Initial yield = $6/6%=$100
This problem explains how to calculate the original price and current price of a preferred stock. It also explains what will happen to the preferred stock price if there is change in the yield on the Standard & Poor's Preferred Stock Index. The concepts are explained with formula and calculations for easy understanding.