Rose has preferred stock selling for 99 percent of par that pays a 9 percent annual coupon. What would be Rose's component cost of preferred stock?
A) 4.55%
B) 8.91%
C) 9.00%
D) 9.09%

Question

Quizplus · Accepted Answer

The component cost of preferred stock is calculated using the formula: 
Dividend payment / Net issuing price. 
Here, the net issuing price is 99 percent of par, which is 0.99 * 100 = $99. 
The dividend payment is 9 percent of par, which is 0.09 * 100 = $9. 
So, the component cost of preferred stock will be: 
$9 / $99 = 0.0909 or 9.09%. 
Therefore, the correct answer is D.

Rose Has Preferred Stock Selling for 99 Percent of Par