cost of preferred stock

Examples of cost of preferred stock in the following topics:

• The Cost of Preferred Stock

  • The cost of preferred stock is equal to the preferred dividend divided by the preferred stock price, plus the expected growth rate.
  • The cost of preferred stock is 13%.
  • Because preferred stock carries a differing amount of risk than other types of securities, we must calculate its asset specific cost of capital to work into our overall weighted average cost of capital.
  • This tells us that the cost of preferred stock is equal to the preferred dividend divided by the preferred stock price, plus the expected growth rate.
  • The cost of preferred stock is equal to the preferred dividend divided by the preferred stock price, plus the growth rate.

• Common and Preferred Stock

  • If a company's stock currently sells for 40 a share, expects to pay a dividend of 2 next year, is subject to flotation costs of 10%, and expects to maintain a growth rate of 10%, the cost of newly issued common stock = 2/[40(1-.10)] + .1 = 14.5%
  • Preferred stock is considered to be a form of equity security.
  • In general, there are four different types of preferred stock: cumulative preferred stock, non-cumulative preferred stock, participating preferred stock, and convertible preferred stock.
  • For new issues of stocks, there are flotation costs that must be taken into consideration before choosing equity as a method of long-term financing.
  • Cost of preferred stock = Next dividend to be paid/[Current market value(1-flotation costs)]Cost of newly issued common stock = Next dividend to be paid/Current market value(1-flotation cost) + projected growth rate.

• The Cost of New Common Stock

  • When it comes to the cost of capital, common stock is one of a few options on the table for raising funding.
  • From various debt instruments to preferred stock to common stock, larger organizations tend to diversify funding input to optimize their potential financial leverage.
  • When it comes to issuing common stock, there are both direct and indirect costs to consider.
  • In terms of literal capital spent, the issuance of new common stock incurs a variety of capital costs both at the initial offering and throughout the process of managing this funding source over time:
  • Weigh the direct and indirect costs of issuing new common stock as a form of capital

• Stock Dividends vs. Cash Dividends

  • Investors' preference for stock or cash depends on their inclinations toward factors such as liquidity, tax situation, and flexibility.
  • Therefore, if investors are not interested in a long-term investment, they will prefer regular cash payments over payments of additional stock.
  • Costs of taxes can also play a role in choosing between cash or stock dividends.
  • A firm that is still in its stages of growth will most likely prefer to retain its earnings and put them toward firm development, instead of sending them to their shareholders.
  • Assess whether a particular shareholder would prefer stock or cash dividends

• Accounting for Sale of Stock

  • Most stock sales involve common stock or preferred stock.
  • The sale of preferred stock is similarly treated, but a separate accounts should be established to record preferred stock and any additional paid in capital for preferred stock sold at above par value.
  • When treasury stock is sold the accounts used to record the transaction will vary depending on whether the stock sold above or below the cost of purchase.
  • Most stock sales involve common stock or preferred stock.
  • Summarize how to account for the sale of common stock, preferred stock and treasury stock

• Preferred Stock

  • Preferred stock (also called preferred shares, preference shares or simply preferreds) is an equity security with properties of both an equity and a debt instrument , and is generally considered a hybrid instrument.
  • The specific terms of owning preferred stock are specified in a certificate of designation.
  • Details with regards to the rights associated with preferred stock will vary with the business entity that issues the shares, and preferred stock can come in a number of different classes.
  • Some examples are prior preferred stock (highest priority), preference preferred stock, convertible preferred stock (exchangeable for common stock), cumulative preferred stock, exchangeable preferred stock, participating preferred stock, putable preferred stock, monthly income preferred stock, and non-cumulative preferred stock.
  • Preferred Stocks are considered a hybrid security with properties of both stocks and bonds, but are subordinate to bonds when it comes to rights of claim to company assets.

• Accounting for Preferred Stock

  • Preferred stock is a class of capital stock that carries certain features or rights not carried by common stock.
  • Within the basic class of preferred stock, a company may have several specific classes of preferred stock, each with different dividend rates or other features.
  • Most preferred stocks are preferred as to assets in the event of liquidation of the corporation.
  • Convertible preferred stock is preferred stock that is convertible into common stock of the issuing corporation.
  • Holders of convertible preferred stock shares may exchange them, at their option, for a certain number of shares of common stock of the same corporation.

• Preferred Stock Rules and Rights

  • Preferred stock usually carries no voting rights, but may carry a dividend and may have priority over common stock in the payment of dividends and upon liquidation.
  • Terms of the preferred stock are stated in a "Certificate of Designation. "
  • Preferred stock is a special class of shares that may have any combination of features not possessed by common stock.
  • The following features are usually associated with preferred stock: Preference in dividends preference in assets, in the event of liquidation, convertibility to common stock, callability, and at the option of the corporation.
  • Preferred stock has a claim on liquidation proceeds of a stock corporation equal to its par (or liquidation) value, unless otherwise negotiated.

• Convertible Stock

  • This type of stock has an embedded option that allows it to be converted into a specified number of shares of common stock at a predetermined price; usually at a premium over the stock's market price.
  • Preferred stock (also called preferred shares) is an equity security with properties of both an equity and a debt instrument, and is generally considered a hybrid.
  • Preferred shares rank higher to common stock during earnings distributions, such as dividends; however, they are subordinate to bonds in terms of their claim to company assets in the event of a business liquidation.
  • Accounting principles require the reporting of convertible preferred stock in the same manner as non-convertible preferreds.
  • Preferred stock is reported in the stockholder's equity section as the number of shares outstanding, multiplied by the stock's market price.

• Claim to Income

  • In the cases of bankruptcy and dividend distribution, preferred stock shareholders will receive assets before common stock shareholders.
  • In the event of bankruptcy, common stock investors receive any remaining funds after bondholders, creditors (including employees), and preferred stock holders are paid.
  • Preferred stock has a claim on liquidation proceeds of a stock corporation equal to its par (or liquidation) value, unless otherwise negotiated.
  • This will be different to common stock shareholders and preferred stock shareholders because of the different prices and rewards based on holding these different kinds of shares.
  • Preferred and common stock both carry rights of ownership, but represent different classes of equity ownership.