Fern has preferred stock selling for 95 percent of par that pays an 8 percent annual coupon. What would be Fern's component cost of preferred stock?
A) 7.60 percent
B) 8.00 percent
C) 8.42 percent
D) 9.00 percent

Question

Quizplus · Accepted Answer

The component cost of preferred stock is calculated as the annual dividend divided by the current price. Here, the annual dividend is 8% of the par value, which is typically $100, so the dividend is $8. The stock is selling for 95% of par, so it's selling for $95. The cost of preferred stock is $8 / $95 = 0.0842 or 8.42%.

Fern Has Preferred Stock Selling for 95 Percent of Par