The cost of preferred stock:
A) is equal to the dividend yield.
B) is equal to the yield to maturity.
C) is highly dependent on the dividend growth rate.
D) is independent of the stock's price.
E) decreases when tax rates increase.

Question

Quizplus · Accepted Answer

The cost of preferred stock is the dividend yield, which is the rate of return that the investor expects to receive through preferred stock dividends. Although preferred stock may have a yield to maturity, this is not used to calculate its cost. The cost of preferred stock is not highly dependent on the dividend growth rate, as preferred stock dividends are usually fixed. The cost of preferred stock is not independent of the stock's price, as the price of preferred stock may affect its yield. The cost of preferred stock does not decrease when tax rates increase, as preferred stock dividends are not tax deductible.

The Cost of Preferred Stock