Question

Bethesda Water has an issue of preferred stock outstanding with a coupon rate of 4.80 percent that sells for $92.78 per share. If the par value is $100, what is the cost of the company's preferred stock?

Answer 1

Cost of preferred stock=5.17%

Step-by-step explanation:

A preferred stock entitles its investor to a fixed amount of dividend for the foreseeable future. The dividend payable by a preferred stock is similar to a perpetuity. Hence, the price of the stock would be the same as the present value of the dividend payable for the foreseeable future.

A preferred stock entitles its owner to a fixed amount of dividend. It is calculated as follows:

Cost of preferred stock = (Preference dividend/stock price ) × 100

Preference dividend = Coupon rate × Nominal value

DATA

Coupon = 4.80%

Nominal Value = 100

Stock price = $92.78

Preference dividend = 4.80% × 100=4.8

Cost of preferred stock = 4.8/92.78× 100 = 5.17%

Cost of preferred stock=5.17%