Preferred Stock Valuation
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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 Preferred Stock Index declines, how will the price of the preferred stock be affected?
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Solution Summary
The solution explains how to value preferred stock for North Pole Cruise Lines
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1. What was the original issue price?
The preferred stock is a perpetuity and so the yield on a preferred stock is given as Dividend Amount/Price.
Yield = Dividend Amount/Price
The original yield at the time of issue as 6%. The ...
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