Fern has preferred stock selling for 95 percent of par that pays an 8 percent annual coupon. What would be Fern's component cost of preferred stock?
A) 7.60%
B) 8.00%
C) 8.42%
D) 9.00%

Question

Quizplus · Accepted Answer

The component cost of preferred stock can be calculated using the formula:
Preferred stock dividend/Net issuing price of preferred stock

Here, Preferred stock dividend = 8% of par value = 0.08* $100(par value) = $8
Net issuing price = 95% of par value = 0.95* $100 (par value) = $95

Therefore, the component cost of preferred stock = $8/$95 = 0.0842 or 8.42% (approx)

Fern Has Preferred Stock Selling for 95 Percent of Par