Question

Cost of Preferred Stock Marme, Inc., has preferred stock selling for 96 percent of par that pays an 11 percent annual coupon. What would be Marme’s component cost of preferred stock?

Answer 1

Component cost of preferred stock is 11.4583 %

Step-by-step explanation:

Given Data:

Preferred stock selling=96 percent of par.

Annual Coupon =11 percent

Required:

What would be Marme’s component cost of preferred stock?

Solution:

The formula we are going to use is:

`i_(stock)=(D_o)/(P_o)`

Where:

`D_o` is 11 percent annual coupon

`P_o` preferred stock selling for 96 percent of par

If we convert the above percentage to dollar using the scale $1=1% then:

`D_o`=$11

`P_o`=$96

`i_(stock)=(\$11)/(\$96)\\ i_(stock)=0.114583`

Component cost of preferred stock is 11.4583 %