Question

You want to estimate Cardinal Co.’s cost of preferred capital. Assume that the preferred shares were issued at $20/share. Today, the price is $22/share. The preferred shares pay an annual dividend of $2. What is the cost of preferred capital?

Answer 1

10%

Step-by-step explanation:

Cost of preferred capital=dividend per share/Par value of preferred capital

=$2/$20=10%

We take issue price of preferred stock for the sake of working cost of capital.