Question

The cost of preferred stock:

A. is unaffected by changes in the market price of the stock.
B. is constant over time.
C. is equal to the stock's dividend yield.
D. increases as the price of the stock increases.
E. increases when a firm's tax rate decreases.

Answer 1

Answer: Option C

Explanation: The value of preferred shares is the rate of return expected by the preferred stockholders of a corporation. It is computed by dividing the regular preferred dividend payment by the current market price of the preferred shares.

In several situations, a preference share's cash flow channel is perpetuity as it has infinite lifespan and each cycle offers a fixed sum of dividends. Thus from the above we can conclude that the correct option is C.