A firm has $1 million market value and it sells preferred stock with a par value of $100.If the coupon rate on the preferred stock is 7% and the preferred stock trades at $95,what is the cost of preferred stock financing?

Question

Quizplus · Accepted Answer

The cost of preferred stock financing is calculated as the dividend divided by the current price. The dividend is 7% of the par value ($100), which is $7. The current price is $95. Therefore, the cost is $7 / $95 = 0.0737 or 7.37%.

A Firm Has $1 Million Market Value and It Sells