Question

Wallace container company issued $100 par value preferred stock 10 years ago. the stock provided a 9 percent yield at the time of issue. the preferred stock is now selling for $67.

Answer 1

The current yield or cost of the preferred stock is obtained as 13.4%.

What is Cost of Preferred Stock?

To raise funds, a company issues preferred stock & pays annual payments dividends to preferred shareholders for an indefinite period of time.

The price of preferred stock is referred to as the annual dividend like a percentage of the stock's current price.

Now according to the question;

The given face value of the stock is  $100.

The total yield at the time of the issue is 9% = 0.09.

Thus, the annual dividend is calculated as;

9% of $100 = $9.

The current/preferred price of the stock is given as $67.

Thus, the current yield will be obtained as;

Current yield = (Annual dividend)/(current price)

Current yield = 9/67 = 0.134

Current yield = 13.4%

Therefore, the current yield or cost of the preferred stock is 13.4%.

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The complete question is-

Wallace container company issued $100 par value preferred stock 10 years ago. the stock provided a 9 percent yield at the time of issue. the preferred stock is now selling for $67. What is the current yield or cost of the preferred stock? (Disregard flotation costs.)