IVY has preferred stock selling for 98 percent of par that pays a 7 percent annual coupon. What would be IVY's component cost of preferred stock?
A) 6.86 percent
B) 7.00 percent
C) 7.14 percent
D) 14.00 percent

Question

Quizplus · Accepted Answer

The component cost of preferred stock is calculated as the annual dividend divided by the current price. Here, the annual dividend is 7% of par value, and since par value is typically $100, the dividend is $7. The stock sells for 98% of par, which is $98. Therefore, the cost of preferred stock is $7 / $98 = 0.0714 or 7.14%.

IVY Has Preferred Stock Selling for 98 Percent of Par