The cost of preferred stock is computed the same as the:
A) pretax cost of debt.
B) rate of return on an annuity.
C) aftertax cost of debt.
D) rate of return on a perpetuity.
E) cost of an irregular growth common stock.

Question

Quizplus · Accepted Answer

The cost of preferred stock is computed as the rate of return required by the investors (preferred shareholders) and it is fixed and perpetual. This is the same as the rate of return on a perpetuity, making option D the correct answer. Option A is incorrect because the pretax cost of debt is based on the interest rate paid on debt and does not apply to preferred stock. Option B is incorrect because the rate of return on an annuity applies to a fixed stream of cash flows whereas preferred stock is a perpetual security. Option C is incorrect because aftertax cost of debt applies to debt financing and does not apply to preferred stock. Option E is incorrect because cost of an irregular growth common stock applies to common stock and not preferred stock.

The Cost of Preferred Stock Is Computed the Same as The