How is the cost of preferred stock calculated?

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Multiple Choice

How is the cost of preferred stock calculated?

Explanation:
Cost of preferred stock is the dividend yield investors require on those shares. It is calculated as the annual dividend per share divided by the current price per share, so Rp = Dp / P0. This reflects the return a investor would earn if they buy the preferred stock at the current price and receive the fixed dividend each year. For example, if the annual dividend is 5 and the price is 100, the cost is 5/100 = 0.05 or 5%. Using par value would only apply if the dividend were described as a percentage of par, but with market pricing you use the current price. Using net income per share relates to earnings, not the cost of preferred stock, and inverting the ratio would misstate the yield.

Cost of preferred stock is the dividend yield investors require on those shares. It is calculated as the annual dividend per share divided by the current price per share, so Rp = Dp / P0. This reflects the return a investor would earn if they buy the preferred stock at the current price and receive the fixed dividend each year. For example, if the annual dividend is 5 and the price is 100, the cost is 5/100 = 0.05 or 5%. Using par value would only apply if the dividend were described as a percentage of par, but with market pricing you use the current price. Using net income per share relates to earnings, not the cost of preferred stock, and inverting the ratio would misstate the yield.

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