ABC Corp. has a large issue of $100 face value, $9 dividend, preferred stock outstanding that is trading in the market at $82. What is the cost of preferred stock today for ABC Corp.?
If I am understanding the question correctly, the cost of the preferred stock, if they were trying to repurchase it, would be $82. The question is a little misleading because technically the preferred stock doesn’t cost ABC Corp. anything (if they aren’t trying to repurchase it). However, if ABC decided to pay dividends they would would have to pay a $9 dividend per share of preferred, and dividends in arrears (if it was cumulative). Please correct me if I have missed the mark.
actually this is the main thing confusing for me too because here they dont give any info for exm wether company wana restructure or do anything with repurchase … lets assume the way u are thinking is right
Repurchasing the preferred techincally wouldn’t be a cost the cost for preferred dividends are, in my opinion, the dividends paid which are $9 or 9% of capital borrowed It does seem a meaningless question to me too.
Cost of capital is always forward looking; so the cost is the cost of issuing one more unit. It’s $9/$82, whatever that calculates to…
Darien is right
Adding to Darien’s post… the cost of preferred stock is: P = D/k 82 = 9/k k = 10.92%