A firm has $2 million market value and it sells preferred stock with a par value of $100.If the coupon rate on the preferred stock is 8% and the preferred stock trades at $90,what is the cost of preferred stock financing?

Question

Quizplus · Accepted Answer

First, we need to calculate the annual preferred dividend per share:
8% of $100 par value = $8 annual dividend per share
Next, we can calculate the yield on the preferred stock:
$8/$90 market price = 0.0889 or 8.89%
Therefore, the cost of preferred stock financing is 8.89%, which is closest to choice B.

A Firm Has $2 Million Market Value and It Sells