Several years ago, Rolen Riders issued preferred stock with a stated annual dividend of 10% of its $100 par value. Preferred stock of this type currently yields 8%. Assume dividends are paid annually.
a. What is the value of Rolen’s preferred stock?
b. Suppose interest rate levels have risen to the point where the preferred stock now yields 12%. What would be the new value of Rolen’s preferred stock?

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September 23, 2011

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