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Computing the price of preferred stock/Inflation defined

Problem # 10-18

The preferred stock of Ultra Corporation pays annual dividend of $6.30. It has a required rate of return of 9 %. Compute the price of the preferred stock.

QUESTION

How do you define inflation and what measures can be taken to lessen the impact of inflation on the economy?

Solution Preview

1. P=$6.3/0.09 =$70

2. Inflation: Sustained, rapid increase in the general price level, as measured by some broad index number of prices (such as Consumer Price Index) over months or years, and mirrored in the correspondingly decreasing purchasing power of the currency. It has its worst effect on the fixed-wage earners, and is a disincentive to save. Any price increase alone however, is not inflation. It is because such increases are self-limiting in their effect, unless they cause an inflationary ...

Solution Summary

The solution includes a definition of inflations and what measures can be taken to lessen the impact of inflation on the economy. In addition it includes a problem which shows how to calculated the price of deferred stock when the annual dividend and required rate of return are provided.

$2.19