Answer:
Component cost of preferred stock is 11.4583 %
Explanation:
Given Data:
Preferred stock selling=96 percent of par.
Annual Coupon =11 percent
Required:
What would be Marme’s component cost of preferred stock?
Solution:
The formula we are going to use is:
[tex]i_{stock}=\frac{D_o}{P_o}[/tex]
Where:
[tex]D_o[/tex] is 11 percent annual coupon
[tex]P_o[/tex] preferred stock selling for 96 percent of par
If we convert the above percentage to dollar using the scale $1=1% then:
[tex]D_o[/tex]=$11
[tex]P_o[/tex]=$96
[tex]i_{stock}=\frac{\$11}{\$96}\\ i_{stock}=0.114583[/tex]
Component cost of preferred stock is 11.4583 %
