Antonio's Pizzeria has 8 % preferred stock outstanding that sells for $71 a share. This stock was originally issued at $58 per share. What is Antonio's cost of preferred stock?

Question

Quizplus · Accepted Answer

The cost of preferred stock is calculated as the dividend per share divided by the current price per share. Since the preferred stock has an 8% dividend rate and it sells for $71 a share, the cost of preferred stock is 8% of the original issue price ($58), which equals $4.64 per share in dividends. Therefore, the cost of preferred stock is $4.64 / $71 = 0.06535 or 6.535%, which is not an option provided. However, the correct approach to find the cost of preferred stock is to use the dividend rate directly since the question implies the 8% is the dividend yield based on the original issue price. The correct calculation is the dividend ($58 * 8%) divided by the current price ($71), which equals $4.64 / $71 = 0.06535 or 6.535%. It seems there was a mistake in my initial explanation. The cost of preferred stock should be calculated directly from the given information without assuming the dividend is based on the original issue price for this calculation. The correct calculation is the dividend yield (8%) divided by the current price ($71), but since the dividend yield is already given as a percentage of the original issue price, the calculation provided was incorrect. The correct answer should be based on the formula: Cost of Preferred Stock = Dividend per share / Current price per share. However, without the correct calculation provided in the options or a misunderstanding in the explanation, there seems to be a mistake in the interpretation of the question or the calculation. The correct formula to use is indeed Cost of Preferred Stock = Dividend per share / Current price per share, but the dividend per share should be considered as the amount that results in an 8% yield on the original issue price, which is not directly provided in the question. The explanation mistakenly calculated the dividend based on a misunderstanding of how the dividend yield applies. The correct approach is to recognize that the 8% preferred stock means the stock pays an annual dividend equal to 8% of the par value, and the cost of preferred stock is then calculated based on the current market price. Without the par value specified, we assume the 8% refers to the dividend rate on its face value or par value, typically $100 for preferred stock, leading to an annual dividend of $8 per share. The cost of preferred stock is then $8 / $71 = 11.27%. My initial explanation contained errors in the calculation and interpretation of the dividend and its application.

Antonio's Pizzeria Has 8 % Preferred Stock Outstanding That Sells