A Firm Has Common and Preferred Stock Outstanding, Both of Which

question 241

Essay

A firm has common and preferred stock outstanding, both of which just paid a dividend of $3 per share. Which do you think will have a higher share price and why? If the firm also has an issue of non-callable debentures outstanding, which do you think investors will require a higher return on, the debentures or the shares of common stock? Explain.

---

Definitions:

Dividend Yield

A measurement comparing the yearly dividends issued by a business to its current market share price.

Dividend Growth Rate

The annualized percentage rate of growth of a company's dividend payments, indicating how quickly the dividend payments have increased over a specific period of time.

Required Returns

The smallest yield an investor predicts to receive from investing in a particular venture or asset.

Constant

A value that does not change.