Traditional Bank has an issue of preferred stock with an annual dividend of $7.50 that just sold for $62 a share. What is the bank's cost of preferred stock?

Question

Business

Phillips

17 May, 15:43

Traditional Bank has an issue of preferred stock with an annual dividend of $7.50 that just sold for $62 a share. What is the bank's cost of preferred stock?

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Answers (1)

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Ian Fry · Answer 1

12.09%

Explanation:

The preferred stock represents a form of equity that an organisation can issue to fund its expansions and developmental projects. The difference is that preferred stock holders do not have the same voting rights as the ordinary or common share holders and hence, do not dilute the ownership of the firm. They are, however, entitled to dividend before the common stock holders.

The Cost of Preferred stock in this question refers to the rate of returns that the holders of the bank's preferred stocks are entitled to.

The Formula for Cost of Preferred Stock is: Rp = D / P0

Rp is Preferred Stock Rate

D is Dividend = $7.50

P0 is the Share Price of the Stock = $62

From the Question, Rp = ($7.5:$62) * 100 = 12.09*100 = 12.09%

The Cost of Preferred Stock or the rate of returns expected is 12.09%