Preferred stock is a hybrid security, because it has some characteristics typica
ID: 2745046 • 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. At the present time, Turnbull Co. does not have any preferred stock outstanding but is looking to include preferred stock in its capital structure in the future. Turnbull has found some institutional investors that are willing to purchase its preferred stock issue provided that it pays a perpetual dividend of $11 per share. If the investors pay $92.25 per share, Turnbull's cost of preferred stock will be .Explanation / Answer
Solution:
Characteristics:
Usually has no voting rights- Debt
No tax adjustments are made when calculating the cost of preferred stock – Equity
Cost of preferred stock= Annual Dividend on Preferred stock/ Current Market price of Preferred stock
= $ 11/ $92.25
= $ 0.11924 per share
= $ 0.12 per share approx.