Question

ABC Co. issues $1,000 par value, 7.2% semiannual coupon bonds, with 15 years to maturity. The company sells the bonds for $750. Find the after-tax cost of debt assuming a tax rate of 35%.

ABC Co. has $100 par value preferred stock that sells for $108 and has a stated dividend of 2.5% of par value. What is the cost of preferred stock?

Answer 1

Cost of preferred stock

The Cost of preferred stock is the rate of return required by holders of the preferred stock. The cost of preferred cost is calculated by dividing the annual preferred dividend by the current market price preferred stocks

Here, we’ve the annual preferred dividend per share = $2.50 per share [$100 x 2.50%]

Current Market Price per share = $108.00 per share

Therefore, the Cost of Preferred Stock = [Annual Preferred Dividend / Market Price of the Stock] x 100

= [$2.50 / $108.00] x 100

= 2.31%

“Hence, the Cost of preferred stock will be 2.31%”