A company has 1.5 million 5% preferred shares with a nominal value of $50 and a market capitalization of $91.5 million. What is the cost of capital for the preferred shares?

Question

Quizplus · Accepted Answer

The cost of capital for the preferred shares is calculated as the dividend yield, which is the annual dividend per share divided by the market price per share. The annual dividend per share is 5% of the nominal value of $50, which is $2.50. The market price per share is $91.5 million divided by 1.5 million shares, which is $61.00. Therefore, the dividend yield is $2.50 divided by $61.00, which is 4.1%.

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