Question

An issue of preferred shares has a par value of $95 per share, with a dividend...

An issue of preferred shares has a par value of $95 per share, with a dividend on par of 8%. If the preferred shares are currently selling for $150 per share, what is the percentage cost of preferred shares?

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Answer #1

Cost of Preferred Stock refers to the rate of return required by the Preferred Stockholders.

It can be calcuated by the formula

Annual Dividend on Preferred Shares / Current Market Price of Shares

The information given in the question is as follows

Dividend = 8% of Par Value

=8% of $95

= $7.60

Percentage Cost of Preferred Shares = (Annual Dividend on Preferred Shares / Current Market Price of Shares) * 100

Where Annual Dividend is $7.60

Current Market Price is $150

Therefore

Percentage Cost of Preferred Shares = (Annual Dividend on Preferred Shares / Current Market Price of Shares) * 100

= ($7.60 / $150) * 100

= 5.07% (rounded off to two decimals)

Therefore, Percentage Cost of Preferred Shares = 5.07%

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