1. What is Preferred Stock Cost?

The cost of preferred stock (r_p) is the rate of return required by investors on a company's preferred stock. It represents the dividend yield on the preferred stock and is used in calculating a company's weighted average cost of capital (WACC).

2. How Does the Calculator Work?

The calculator uses the preferred stock cost equation:

Where:

• \( r_p \) — Cost of preferred stock (as percentage)
• \( D \) — Annual preferred dividend (in USD)
• \( P_0 \) — Current preferred stock price (in USD)

Explanation: The equation calculates the dividend yield on preferred stock, which represents the cost to the company of issuing preferred stock.

3. Importance of Preferred Stock Cost Calculation

Details: Calculating the cost of preferred stock is essential for determining a company's overall cost of capital, which is used in capital budgeting decisions and company valuation.

4. Using the Calculator

Tips: Enter the annual preferred dividend in USD and the current preferred stock price in USD. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between preferred and common stock cost?
A: Preferred stock has fixed dividends, so its cost is calculated differently from common stock which uses dividend growth models.

Q2: Are preferred dividends tax-deductible?
A: No, preferred dividends are paid from after-tax income, unlike interest payments which are tax-deductible.

Q3: What if preferred stock has variable dividends?
A: For adjustable-rate preferred stock, the current dividend rate should be used in the calculation.

Q4: How does flotation cost affect the calculation?
A: If considering flotation costs, the denominator should be net proceeds (price minus flotation costs).

Q5: What are typical preferred stock cost values?
A: Preferred stock costs typically range between 5-10%, higher than debt but lower than common equity.