The Cost of Preferred Stock Calculator helps businesses and investors determine the cost of issuing preferred stock. This tool provides a way to calculate the effective cost of raising capital through preferred stock issuance, considering both the annual dividend payments to shareholders and the flotation costs associated with issuing the shares.
By understanding the cost of preferred stock, companies can make informed decisions about financing and optimize their capital structure, balancing debt and equity financing to minimize overall costs.
Formula of Cost of Preferred Stock Calculator
The formula for calculating the cost of preferred stock is:
Cost of Preferred Stock = Annual Dividend per Share ÷ (Current Market Price per Share − Flotation Costs per Share)
Breakdown of Variables
- Annual Dividend per Share
Annual Dividend per Share = Dividend Rate × Par Value of the Preferred Stock
The annual dividend is the amount the company promises to pay preferred stockholders each year, calculated based on the dividend rate and the par value of the preferred stock. - Current Market Price per Share
This is the current trading price of the preferred stock in the market, which reflects the price investors are willing to pay for the stock. - Flotation Costs per Share
Flotation Costs are the costs incurred by a company when issuing new preferred stock. These costs typically include underwriting fees, legal fees, and other expenses associated with the issuance process. They are expressed as a monetary value per share.
General Terms and Pre-Calculated Values Table
Term | Pre-Calculated Value |
---|---|
Average Dividend Rate | 5%–8% per year |
Typical Flotation Costs | $1–$3 per share |
Preferred Stock Par Value | $25–$100 per share |
Market Price for Preferred Stock | $100–$200 per share |
This table provides typical ranges for key components in the cost of preferred stock calculation, helping investors and companies estimate values more easily.
Example of Cost of Preferred Stock Calculator
Scenario: A company plans to issue preferred stock with the following details:
- Dividend Rate: 6%
- Par Value of Preferred Stock: $100
- Current Market Price per Share: $95
- Flotation Costs per Share: $2
Step 1: Calculate the Annual Dividend per Share
Annual Dividend per Share = Dividend Rate × Par Value of the Preferred Stock
Annual Dividend per Share = 6% × $100 = $6
Step 2: Apply the Formula
Cost of Preferred Stock = $6 ÷ ($95 − $2)
Cost of Preferred Stock = $6 ÷ $93 = 0.0645 or 6.45%
Thus, the cost of issuing preferred stock is 6.45%.
Most Common FAQs
The cost of preferred stock is essential for understanding how much it will cost the company to raise capital using this financing option. It helps compare preferred stock financing with other methods, such as debt or common equity.
Flotation costs increase the effective cost of issuing preferred stock. Higher flotation costs result in a higher overall cost of raising capital, which should be factored into financial planning and decision-making.
Yes, the cost of preferred stock can change depending on market conditions, the company’s dividend rate, and flotation costs. Changes in the stock's market price or adjustments to dividend rates can impact the cost of preferred stock.