FIN 614: Financial Management Larry Schrenk, Instructor.

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FIN 614: Financial Management Larry Schrenk, Instructor

1.What is the Cost of Preferred Stock? 2.Calculating the Cost of Preferred Stock

Cost to the Firm to Secure Preferred Stock Financing Required Rate of Return to Preferred Stock Holders

Calculate the ‘implied’ discount rate (as we have already done). Here we assume the preferred stock has no maturity, so it is a perpetuity. If it did have a maturity, you would use the analogous reasoning for the annuity formula. Solve the pricing formula for ‘r’.

A firm has issued preferred stock without a maturity that pays $8.00 annually, and its current price is $ What is its implied rate of return?

We do not include any flotation costs We assume that the preferred stock has no tax implications

FIN 614: Financial Management Larry Schrenk, Instructor

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