Question

the cost of preferred stock is equal to the annual preferred dividend divided by the current price of the preferred stock.

Answer 1

The statement is accurate. The cost of preferred stock is indeed calculated by dividing the annual preferred dividend by the current price of the preferred stock.

Step-by-step explanation:

The cost of preferred stock is a crucial metric for businesses and investors, representing the rate of return required by investors who hold preferred shares. The formula mentioned in the statement,
`\( R_p = \frac{D_p} {P_p} \),` calculates this cost, where
`\( R_p \)` is the cost of preferred stock,
`\( D_p \)` is the annual preferred dividend, and
`\( P_p \)` is the current price of the preferred stock. This formula reflects the idea that the cost of preferred stock is essentially the dividend yield, representing the annual dividend as a percentage of the stock's current market price.

In financial terms, the cost of preferred stock serves as a key input in various calculations, such as the weighted average cost of capital (WACC). Investors and financial analysts use this metric to assess the attractiveness of preferred stock as an investment. A lower cost of preferred stock indicates a more favorable situation for the company, as it implies a lower cost of financing through this particular equity instrument. Conversely, a higher cost of preferred stock may signal higher risk or less attractiveness to potential investors.

In professional writing, precision and clarity are paramount, particularly when discussing financial concepts. By explaining the formula and the significance of the cost of preferred stock, the response provides a clear understanding of how this metric is calculated and its importance in financial decision-making.