Uptown Inc. has preferred stock selling for 102 percent of par that pays a 6 percent annual coupon. What would be Uptown's component cost of preferred stock?
A) 6.12 percent
B) 6.00 percent
C) 5.88 percent
D) 1.02 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 6% of par (assuming par is $100, this is $6), and the stock sells for 102% of par ($102). So, the cost is $6 / $102 = 0.0588 or 5.88%.