Durango Water Works: Calculating Preferred Stock's Yield-To-Maturity
What is the preferred stock’s yield-to-maturity for Durango Water Works?
Given data:
- Par (maturity value): $75.00
- Quarterly dividend: $1.10
- Retirement period: 20 years
- Current market price: $68.00
Answer:
The preferred stock's yield-to-maturity is 6.64%.
Yield to maturity (YTM) is a crucial metric for assessing the return on investment in preferred stocks. In the case of Durango Water Works, the preferred stock has a par value of $75.00, pays a quarterly dividend of $1.10, and will be retired in 20 years. The current market price of the preferred stock is $68.00.
To calculate the yield-to-maturity, we use the formula:
- Yield to maturity (YTM) = {(preferred dividend + [(par value - market value)/n]) / [(par value + market value)/2]}
Here's a step-by-step calculation:
- Preferred dividend = $1.10
- n = 20 years x 4 quarters = 80 quarters
- Par value = $75.00
- Market value = $68.00
Substitute the values into the formula:
- YTM = {($1.10 + [($75 - $68)/80]) / [($75 + $68)/2]}
- YTM = {$1.10 + [$7 / 80]) / [$143/2]}
- YTM = $1.1875 / $71.50 = 0.0166 (quarterly yield)
- YTM = 0.0166 x 4 = 0.0664 = 6.64% (annual yield)
Therefore, the yield-to-maturity of Durango Water Works' preferred stock is 6.64%.