Question

Holdup Bank has an issue of preferred stock with a $0.80 stated dividend that just sold for $54.58 per share. What is the bank's cost of preferred stock?

Enter the answer with 4 decimals (e.g. 0.1234).

Answer 1

Cost of Preferred Stock

Cost of Preferred Stock is calculated by using the following formula

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

Here, we’ve Annual Dividend per share = $0.80 per share

Current Market Price per share = $54.58 per share

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

= [$0.80 / $54.58] x 100

= 1.47%

“Hence, the Cost of Preferred Stock will be 0.0147”