USA: +1 725-224-8795 
Sign in
The cost of preferred stock:
Select one:
a. is equal to the annual dividend divided by the present value of all the stock’s dividend payments.
b. increases as the beta of the firm increases.
c. varies as tax rates vary.
d. is generally computed using the CAPM.
e. is equal to the annual dividend divided by the par value of the stock.
Expert Answer
cost of preferred stock = annual dividend/current price of preferred stock
current price of preferred stock = present value of all future dividend payments (since dividends are the only cashflows to preferred stock holders)
Option A is correct.
cost of preferred stock is not related to CAPM and unlike interest payments on debt, preferred dividend payments are not tax deductible. Hence, tax rate has no impact on the cost of preferred dividend.
