What would be the value of rolen preferred stock

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Question - A pharmaceutical company has experienced a market re-evaluation lately due to a number of mergers. The firm has a bond issue outstanding with 10 years to maturity and a coupon rate of 7% (paid quarterly).

(a) What is the current value of these bonds, assuming that the level of interest rates has now risen to an effective rate of 12 percent?

(b) Rolen Riders issued preferred stock with a stated dividend of 6% of par. Preferred stock of this type currently yields 7%, and the par value is $25. Assume dividends are paid annually. What is the value of Rolen's preferred stock?

Suppose interest rate levels rise to the point where the preferred stock now yields 9%. What would be the value of Rolen's preferred stock?

(c) Assume that at the beginning of 2006 the expected interest rate for 2006 is 7 percent, for 2007 it is 5 percent, for 2008 it is 4 percent, and for 2009 it is 4.5 percent. What is the average inflation rate, over the four year period, if the real rate of interest is 2.5%?

Reference no: EM133056015

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