8.5
The cost of preferred stock represents the return that investors require on the preferred stock issued by a company.
This cost is significant because it helps a company decide whether issuing preferred stock is a financially viable option to raise capital.
The formula for calculating the cost of preferred stock is expressed as the ratio of the annual dividend paid on the preferred stock to the current market price per share of that stock.
For example, consider a company that issues preferred stock with a par value of one hundred dollars and pays an annual dividend of five dollars per share.
If the current market price of this preferred stock is eighty dollars per share, the cost of the preferred stock can be calculated as six point two five percent using the formula.
Six point two five percent is the annual return investors expect from the preferred stock.
The company can use this rate to assess the cost-effectiveness of issuing additional preferred stock compared to other financing options, such as bonds or common stock.
The cost of preferred stock usually falls between the cost of debt and the cost of equity. It tends to be higher than the cost of debt because dividen…
Copyright © 2026 MyJoVE Corporation. All rights reserved.