Question

ILK has preferred stock selling for 95 percent of par that pays a 9 percent annual coupon. What would be ILK’s component cost of preferred stock? (Round your answer to 2 decimal places.)

Answer 1

Answer:

9.47%

Explanation:

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

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

where,

Preferred stock sale price = 100 ×  95% = $95

And, the annual coupon = 9% × 100 = $9

= $9 ÷ $95

= 9.47%

We assume the par value be 100

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