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?
A)6.75%
B)7.15%
C)7.21%
D)7.37%
E)8.12%

Question

Quizplus · Accepted Answer

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

A Firm Has $1 Million Market Value and It Sells