Montreal Financing Has Preferred Shares with a Par Value of $20

question 1

Essay

Montreal Financing has preferred shares with a par value of $20 outstanding.These shares pay $1.60 in dividends annually.
A) What will be the market price of these shares if the current market yield is 11 percent?
B) What will be the market price of these shares if the current market yield is 11 percent and the issue is retractable in five years at the par value?
C) What is the value of this retractable feature? Why does it have value?
D) What will be the market price of these shares if the issue is immediately redeemable and retractable at par?

• A) What will be the market price of these shares if the current market yield is 11 percent?
• B) What will be the market price of these shares if the current market yield is 11 percent and the issue is retractable in five years at the par value?
• C) What is the value of this retractable feature? Why does it have value?
• D) What will be the market price of these shares if the issue is immediately redeemable and retractable at par?

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Definitions:

Patent

A legal right granted by a government to an inventor, giving exclusive rights to use, make, and sell an invention for a certain period of time.

Inelastic Demand

A situation in which the demand for a product does not increase or decrease significantly when the price changes.

Monopoly Power

Monopoly power denotes the extent to which a firm can set the price for its product above marginal cost due to the lack of competition in its market.

Producer Surplus

The difference between what producers are willing to sell a good for and the actual market price they receive.