Question

3. The 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.

Characteristics	Debt	Equity
Usually has no voting rights.
No tax adjustments are made when calculating the cost of preferred stock.

Consider the case of Tamin Enterprises:

At the present time, Tamin Enterprises does not have any preferred stock outstanding but is looking to include preferred stock in its capital structure in the future. Tamin has found some institutional investors that are willing to purchase its preferred stock issue provided that it pays a perpetual dividend of $10 per share. If the investors pay $110.22 per share for their investment, then Tamin’s cost of preferred stock (rounded to four decimal places) will be     .

Answer 1

Debt Equity Characteristic 1. Usually has no voting rights 2. No tax adjustments are made when calaulating the wst of preferred stock Cost of preferred stock = Dividend Price = 10 110.22 -0.0907 or 9.0728%