Question

At the present time, Ferro Enterprises does not have any preferred stock outstanding but is looking to include preferred stock in its capital structure in the future. Ferro has found some institutional investors that are willing to purchase its preferred stock issue provided that it pays a perpetual dividend of $14 per share. If the investors pay $134.26 per share for their investment, then Ferro’s cost of preferred stock (rounded to four decimal places) will be ___________?

Answer 1

Answer:

Cost of preferred stock

= Perpetual dividend

  Current market price

= $14.00

  $134.26

= 0.1043 = 10.43%

Explanation:

Cost of preferred stock is calculated as perpetual dividend divided by current market price. Cost of preferred stock is the minimum rate of return expected by preferred stock holder.