The Hold Up Bank has issued 30,000,000 shares of preferred stock

Finance Oct 31, 2020

The Hold Up Bank has issued 30,000,000 shares of preferred stock. Each share pays a $3.00 quarterly dividend in perpetuity. If the next dividend is to be paid later today, and one preferred share currently costs $123.00, what is the cost of preferred equity? Calculate as an EAR, not an APR.

Expert Solution

Computation of the cost of preferred equity:-

Cost of preferred equity = Quarterly dividend / Preferred share price

= $3 / $123

= 2.44%

EAR = (1+rate)^n-1

= (1+2.44%)^4-1

= 1.1012 - 1

= 10.12%

Hence, the cost of preferred equity (EAR) = 10.12%

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