QuestionJuly 21, 2025

ILK has preferred stock selling for 97 percent of par that pays an 8 percent annual coupon. What would be ILK's component cost of preferred stock? Note: Round your answer to 2 decimal places. Cost of preferred stock square %

ILK has preferred stock selling for 97 percent of par that pays an 8 percent annual coupon. What would be ILK's component cost of preferred stock? Note: Round your answer to 2 decimal places. Cost of preferred stock square %
ILK has preferred stock selling for 97 percent of par that pays an 8 percent annual coupon.
What would be ILK's component cost of preferred stock?
Note: Round your answer to 2 decimal places.
Cost of preferred stock square %

Solution
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Answer

8.25% Explanation 1. Identify the formula for cost of preferred stock The cost of preferred stock is calculated using the formula: **r_p = \frac{D_p}{P_0}**, where D_p is the dividend and P_0 is the price. 2. Calculate the annual dividend Given an 8% annual coupon on par value, D_p = 0.08 \times 100 = 8. 3. Determine the current price of preferred stock Preferred stock sells for 97% of par, so P_0 = 0.97 \times 100 = 97. 4. Calculate the component cost of preferred stock Substitute values into the formula: r_p = \frac{8}{97} \approx 0.08247. 5. Convert to percentage Multiply by 100 to convert to percentage: r_p \approx 8.25\%.

Explanation

1. Identify the formula for cost of preferred stock<br /> The cost of preferred stock is calculated using the formula: **$r_p = \frac{D_p}{P_0}$**, where $D_p$ is the dividend and $P_0$ is the price.<br /><br />2. Calculate the annual dividend<br /> Given an 8% annual coupon on par value, $D_p = 0.08 \times 100 = 8$.<br /><br />3. Determine the current price of preferred stock<br /> Preferred stock sells for 97% of par, so $P_0 = 0.97 \times 100 = 97$.<br /><br />4. Calculate the component cost of preferred stock<br /> Substitute values into the formula: $r_p = \frac{8}{97} \approx 0.08247$.<br /><br />5. Convert to percentage<br /> Multiply by 100 to convert to percentage: $r_p \approx 8.25\%$.
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