Case Narrative: A firm’s capital structure includes the following securities. It
ID: 2779861 • Letter: C
Question
Case Narrative:
A firm’s capital structure includes the following securities. It has 500,000 shares of common stock (equity) outstanding, selling for $20 per share. The preferred stock share price is $50 and which a $4 dividend with no growth expected. Each share of common stock sells for $20 and pays a $1.00 dividend, which is expected to grow by 2% per year. The current price of the bonds is $818, and the coupon rate is 5%. The bonds will mature in 10 years.
What is the cost (required rate of return) of the preferred stock?
Explanation / Answer
What is the cost (required rate of return) of the preferred stock?
=dividend/ preferred stock share price
=4/50
=0.08
=8.00%
the above is the answer