Question

Fern has preferred stock selling for 93.5 percent of par that pays an 9.5 percent annual coupon. What would be Fern's component cost of preferred stock?

Answer 1

Answer:

10.16%

Explanation:

The computation of the cost of preferred stock is shown below:

Cost of preferred stock = Annual coupon ÷ Selling Price of preferred stock per share

= $95 ÷ $935

= 10.16%

The annual coupon would be

= Par value × coupon percent

= $1,000 × 9.5%

= $95

And, the selling price would be

= Par value × selling percent

= $1,000 × 93.5%

= $935

We assume the par value is $1,000

Simply we divide the annual coupon by the selling price of preferred stock per share so that the correct cost of preferred stock can be determined