Question

Chocolate Coins Bank issued shares of preferred stock with a $9 stated dividend. This morning these shares were selling for $89 each. Calculate the bank's cost of preferred stock.

rev: 09_20_2012

9.00%

10.11%

9.71%

10.52%

10.62%

Answer 1

Solution:

The cost of preferred stock is calculated using the following formula:

= Annual Dividend paid on Preferred Stock / Current Market Price of Preferred Stock

As per the Information given in the question we have

Annual Dividend paid on Preferred Stock = $ 9   ; Current market Price of Preferred Stock = $ 89

Applying the above values in the formula we have :

The cost of preferred stock = ( $ 9 / $ 89 ) = 10.11 %

Thus, the cost of preferred stock is the second option = 10.11 %