Preferred stock question. I need help with part b.

A share of preferred stock of MXT Ltd. is expected to pay $1.5 per quarter into indefinite future. The current annual expected rate of return (k) is 12%. Suppose that an investor buys 10 shares today and holds them for two years. Find his/her cash flows on a timeline in each of the following situations:

a. Interest Rates don't change
b. The required annual expected ROR on the preferred stock becomes 8% bu the end of year 2.

To find the cash flows on a timeline for each situation, we need to calculate the dividends received in each quarter over the two-year period, taking into account the change in the required annual expected rate of return.

For part b, where the required annual expected rate of return decreases to 8% by the end of year 2, we need to adjust the cash flows accordingly.

First, let's calculate the cash flows under the assumption that the interest rates don't change:

1. Calculate the quarterly dividend: $1.5
2. Multiply the quarterly dividend by the number of shares (10) to get the total quarterly dividend: $1.5 * 10 = $15
3. Multiply the quarterly dividend by the number of quarters in a year (4) to get the annual dividend: $15 * 4 = $60
4. Multiply the annual dividend by the number of years (2) to get the total dividends over the two-year period: $60 * 2 = $120

So, under the assumption that interest rates don't change, the investor will receive a total of $120 in dividends over the two-year period.

Now, let's calculate the cash flows when the required annual expected rate of return decreases to 8% by the end of year 2:

1. Calculate the quarterly dividend: $1.5
2. Multiply the quarterly dividend by the number of shares (10) to get the total quarterly dividend: $1.5 * 10 = $15
3. Multiply the quarterly dividend by the number of quarters in a year (4) to get the annual dividend: $15 * 4 = $60
4. Calculate the present value of the annual dividend at the end of year 2 using the new required annual expected rate of return (8%): $60 / (1 + 0.08)^2 = $52.25
5. Add the present value of the dividend to the dividends received in the first year: $52.25 + $60 = $112.25

So, when the required annual expected rate of return decreases to 8% by the end of year 2, the investor will receive a total cash flow of $112.25 over the two-year period.

Note: It's important to recognize that when the required annual expected rate of return decreases, the present value of future cash flows increases as there is less discounting applied to those cash flows. This is why the total cash flow in this situation ($112.25) is lower than the total cash flow in the situation where interest rates don't change ($120).