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43 Corporate Finance Capital budgeting Solving for r yields the cost of preferred stocks: (38) Cost of preferred stocks rpreferred DIV
P Thus, the cost of a preferred stock is equal to the dividend yield. 6.2 Cost of capital for new projects
A new investment project should be evaluated based on its risk, not on company cost of capital. The
company cost of capital is the average discount rate across projects. Thus, if we use company cost of
capital to evaluate a new project we might:
- Reject good low-risk projects
Accept poor high-risk projects True cost of capital depends on project risk. However, many pro...
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