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Unformatted text preview: Answers to Suggested Problems Chapter 2: 1. Taxable equivalent yield = 0.675 / (1- 0.35) = 0.1038 or 10.38%. 3. a. You would have to pay the asked price of: 118:31 = 118.96875% of par = $1,189.6875 b. The coupon rate is 11.75%, implying coupon payments of $117.50 annually or, $58.75 semiannually. C. Current yield = (Annual coupon income/price) = 117.50/1189.6875=9.8765% 4. Preferred stock is like long-term debt in that it typically promises a fixed payment each year. In this way, it is a perpetuity. Preferred stock is also like long-term debt in that it does not give the holder voting rights in the firm. Preferred stock is like equity in that the firm is under no contractual obligation to make the preferred stock dividend payments. Failure to make payments does not set off corporate bankruptcy. With respect to the priority of claims to the assets of the firm in the event of corporate bankruptcy, preferred stock has a higher priority than common equity but a lower priority than bonds....
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This note was uploaded on 04/09/2012 for the course FIN 431 taught by Professor Sun during the Spring '12 term at Old Dominion.
- Spring '12