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?
a) Original issue price = Fixed Dividend / Initial yield = $6/6%=$100
The problem provides solution to North Pole Cruise Lines preferred stock value. It calculates the original issue price from fixed dividend and yield, calculates the current value fusing fixed dividend and current yield and discuss the effect of change in S&P preferred stock index on the value of the preferred stock.