IVY has preferred stock selling for 98 percent of par that pays a 7 percent annual coupon. What would be IVY's component cost of preferred stock?
A) 6.86%
B) 7.00%
C) 7.14%
D) 14.00%

Question

Quizplus · Accepted Answer

The component cost of preferred stock is calculated as the annual dividend divided by the current price. The annual dividend is 7% of par, and the stock sells for 98% of par. Thus, the cost is 7% / 98% = 7.14%.

IVY Has Preferred Stock Selling for 98 Percent of Par