Question

What is the proper estimate for the cost of preferred stock in estimating a company's WACC?a. The estimated cost of newly issued preferred stockb. The dividend yield on existing preferred stock's par value.c. The historical return on the company's preferred stock.d. None of the above.

Answer 1

Answer: Option A

Explanation: In simple words, WACC refers to the cost of total capital that a company has borrowed form the market in its weighted average form. It includes all sources of debt whether retained earning, equity, debt or preferred stock.

While calculating WACC the analyst takes the market value of the capital sources into consideration, thus, in case of preferred stock the cost of newly issued preferred shares must be taken as they depict the actual cost that the company has to bear.