Calculating the Cost of Preferred Stock: A Comprehensive Guide

Determine the cost of newly issued preferred stock.

Calculating how much it will cost a company to issue stock helps that business to determine whether preferred stocks fit into their financial plan. When considering the cost to a company to issue new preferred stock, you should research the company to gather the information needed. Preferred stock differs from common stock since holders of preferred stock usually do not vote on company matters, but their dividends are paid to preferred investors before common shareholders'. Avoid confusing the cost of preferred stock with the price. Cost evaluates the cost to the company to issue the stock as a percentage, while the price refers to the amount of money an investor spends to purchase preferred stock.

Step 1

Convert the flotation cost percent to a decimal by dividing the number by 100. For example, a 5 percent flotation cost divided by 100 would be: 5/100=0.05

Step 2

Subtract the decimal of the flotation cost from 1. For the example: 1 – 0.05 = 0.95

Step 3

Multiply the market price for the preferred stock by one minus the flotation cost. For the example, a market price of $100 would yield: 100x (0.95) = 95.

Step 4

Divide the dividend paid by the preferred stock by this number. For the example, a dividend for the stock of $5 would result in: 5/95 = 0.053

Step 5

Multiply this result by 100 to find the cost of the newly issued preferred stock as a percent. For the example: 0.053 x 100 = 5.3 percent.

Things You'll Need

• Flotation cost to the company (percent)

• Dividend for the preferred stock (dollars)

• Market price of the preferred stock (dollars)

• Calculator (optional)