Horizon Communications stock pays a fixed annual dividend 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 on preferred stock decreases, the value of the preferred stock increases. In this case, the decrease from 12% to 10% means that Horizon's preferred stock has increased in value. Using the formula for calculating the value of a preferred stock: value = dividend / yield, we can see that the value of Horizon's preferred stock has increased from $25 ($3 / 0.12) to $30 ($3 / 0.10). Therefore, the value of Horizon's preferred stock increased by $5.00. The dividend itself did not change.

Horizon Communications Stock Pays a Fixed Annual Dividend of $3