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%.

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