Cost of preferred stock Preferred stock is a hybrid security, because it has som

Question

Cost of preferred stock Preferred stock is a hybrid security, because it has some characteristics typical of debt and others typical of equity. The following table lists various characteristics of preferred stock. Determine which of these characteristics is consistent with debt and which is consistent with equity. At the present time, Galbraith Co. does not have any preferred stock outstanding but is looking to include preferred stock in its capital structure in the future. Galbraith has found some institutional investors that are willing to purchase its preferred stock issue provided that it pays a perpetual dividend of $13 per share. If the investors pay $92.25 per share, Galbraith's cost of preferred stock will be

Explanation / Answer

Dividends are fixed in Debt.

Usually has no specified maturity date in Equity.

Cost of preferred stock (Rps ) = Dps / Pnet where Dps = Preferred dividend, Pnet = Net issuing price

                                          = $13 / $92.25 = $0.14

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