Cost of Capital of Preferred Shares

How do you calculate the cost of capital of a company preferred share with a 9% par value of $100 and an amount of $450,000?

Assuming it is not convertible then the cost of capital is simply 9% if that is the coupon/dividend rate.

Ah, I see. Assuming it is not convertible, why is the cost of capital 9% if I may know? Is it because you are assuming the bond is sold at par value?

The questions been bugging me for awhile now so thank you so much for answering!

yep. cost of capital. is really the annual interest paid by the co / cash proceeds received…

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What is the market price of a share preferred?

The cost of preferred capital is:

\frac{dividend\ rate × par}{market\ price}

I would assume the preferred stock is sold on par value.


Common stock isn’t (necessarily).

Bonds aren’t (necessarily).

So . . . why should preferred stock?

i cant rmemeber. but were there questions where the answer was not enough info. i also remember that there were certain rules. like rounding or assuming par (maybe). lol

I’ve never seen a “not enough info” answer choice.

They would not expect you to assume that any security’s market price is par.

i think if you bought it at par value , the cost of capital of preferred shares gonna be 9% . preferred shares work as bonds . it deponds on the price you bought

Old thread but still…It depends on the current market price of the preferreds if you are calculating the cost of capital for a company. Simply, the yield of the preferreds at market prices today are the best guess at what rate of return the company would need to issue preferreds at if they were to do it today.