Question

Billy's Goat Coats has a preferred share issue outstanding with a current price of $38.89. The firm last paid a dividend on the issue of $3.50 per share.

What is the firm's cost of preferred equity? Round your final answer to the nearest percentage.

a) 9%
b) 10%
c) 8%
d) 7%

Answer 1

A) 9%

Step-by-step explanation:

Billy's cost of preferred equity is how much interest the owners of preferred stock require Billy to pay them for lending money to the company, i.e. the rate or return required by preferred stockholders.

It is calculated by dividing the dividend paid to preferred stock by the current price of preferred stock = $3.50 / $38.89 = 9%