A firm has $3 million market value and it sells preferred stock with a par value of $100.If the coupon rate on the preferred stock is 9% and the preferred stock trades at $95,what is the cost of preferred stock financing?

Question

Quizplus · Accepted Answer

Firstly, we need to calculate the annual dividend paid on the preferred stock.

Annual dividend = Coupon rate * Par value
Annual dividend = 0.09 * $100 = $9

Next, we need to find the yield or cost of preferred stock financing.

Yield = Annual dividend / Market value of preferred stock 
Yield = $9 / $95 = 0.0947 or 9.47%

Therefore, the cost of preferred stock financing is 9.47%.

The best choice is B.

A Firm Has $3 Million Market Value and It Sells