Nominalkpisused

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 1: What is the cost of Example 1: What is the cost of preferred stock? Your company has preferred stock that has an annual dividend of $3. If the current price is $25, what is the cost of preferred stock? KP = 3 / 25 = 12% Example 2: What is the cost of Example 2: What is the cost of preferred stock? Your company has preferred stock that has an annual dividend of $10. If the current price is $111.10, what is the cost of preferred stock? kp = Dp / Pp = $10 / $111.10 = 9% Component cost of preferred stock Component cost of preferred stock Preferred dividends are not tax­deductible, so no tax adjustments necessary. Just use kp. Nominal kp is used. Our calculation ignores possible flotation costs. Is preferred stock more or less risky Is preferred stock more or less risky to investors than debt? More risky; company not required to pay preferred dividend. However, firms try to pay preferred dividend. Otherwise, (1) cannot pay common dividend, (2) difficult to raise additional funds, (3) preferred stockholde...
View Full Document

This document was uploaded on 01/14/2014.

Ask a homework question - tutors are online