Horizon Communications shares pays a fixed annual dividend of $3.00.Because of lower inflation, the market's required yield on this preference shares has gone from 12% to 10%.As a result [blank].

Question

Quizplus · Accepted Answer

As the required yield decreases from 12% to 10%, it means that investors are willing to accept a lower return on their investments in preference shares. This also means that the value of Horizon Communications' preference shares will increase. Using the dividend discount model, we can calculate the new value of Horizon's preferred shares as follows:

New value = Annual dividend ÷ Required yield 
New value = $3.00 ÷ 10% 
New value = $30.00

So, the value of Horizon's preferred shares increased by $5.00 from its original value of $25.00 ($3.00 ÷ 12%). Therefore, the correct answer is D.

Horizon Communications Shares Pays a Fixed Annual Dividend of $3