Question

IVY has preferred stock selling for 97.5 percent of par that pays a 7.5 percent annual coupon. What would IVY's component cost of preferred stock?

a. 7.69 percent

b. 18.75 percent

c. 7.50 percent

d. 7.31 percent

Answer 1

Solution:
	Answer is a. 7.69 Percent
Working Notes:
	Cost of preferred stock = Annual coupon /Current price
	Annual coupon = par value x annual coupon rate
	=$100 x 7.5%
	=$7.50 per share
	Current price = par value x 97.5%
	Current price = $100 x 97.5%
	=$97.50 per share
	Cost of preferred stock = Annual coupon /Current price
	=$7.50/$97.50
	=0.076923077
	=7.69 %
	=7.69 Percent
Notes:	Par value is assumed is $100
IVY's component cost of preferred stock is cost of preferred stock which we get by dividing Annual dividend with current price of the preferred stock.
			Please feel free to ask if anything about above solution in comment section of the question.