Preferred stock is a hybrid security, because it has some characteristics typica
ID: 2615344 • Letter: P
Question
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. Characteristics Usually has no voting rights. Usually has no specified maturity date. Debt Equity Consider the case of Ferro Enterprises: At the present time, Ferro Enterprises does not have any preferred stock outstanding but is looking to include preferred stock in its capital structure in the future. Ferro has found some institutional investors that are willing to purchase its preferred stock issue provided that it pays a perpetual dividend of $12 per share. If the investors pay 137.66 per share for their investment, then Ferro's cost of preferred stock (rounded to four decimal places) will beExplanation / Answer
Solution 1:
Usually has no voting rights: Debt
Usually has no specified maturity date: Equity
[Comment: Debt has no voting rights and Equity have no maturity date]
Solution 2:
Cost of preferred stock = Preferred dividend / Cost of preferred stock
Cost of preferred stock = $12 / $137.66
Cost of preferred stock = 8.7171%