Horizon Communications stock pays a fixed annual dividend of of $3.00.Because of lower inflation,the market's required yield on this preferred stock has gone from 12% to 10%.As a result:
A)Horizon's dividend decreased by 6 cents.
B)The value of Horizon's preferred increased by $3.00.
C)The value of Horizon's preferred decreased by $5.00.
D)The value of Horizon's preferred increased by $5.00.

Question

Quizplus · Accepted Answer

When the market's required yield decreases, the value of the preferred stock increases. Using the formula: Value of Preferred Stock = Annual Dividend / Required Yield, we can see that when the required yield decreases from 12% to 10%, the value of Horizon's preferred stock increases from $25 ($3.00 / 0.12) to $30 ($3.00 / 0.10), which is an increase of $5.00. Therefore, the correct choice is D. Horizon's dividend remains the same at $3.00.

Horizon Communications Stock Pays a Fixed Annual Dividend of Of $3.00.Because