When calculating the cost of capital, how do you determine the cost of preferred stock? and OMA - Shenzhen Stock Exchange construction 2011-0124 06.jpg

When calculating the cost of capital, how do you determine the cost of preferred stock?

Where could I find the initial price of a corporations preferred stock and the flotation costs associated with the underwriting of the preferred stock?


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Answer by csanda
Preferred stock will either be quasi-debt (with fixed preferred dividends, but having some equity characteristics) or be quasi-equity (with floating preferred dividends and pronounced equity characteristics like super-voting rights, convertability).

If it is the former, use the post-tax dividend yield (rather than pre- with debt because there is no tax shelter). You can tweak the cost of preferreds up to account for the equity features.

If it is the latter, treat it like common and then tweak it downward for the embedded preferrential features (e.g. super voting, convertable calls) and seniority over common.

Preferred par will be noted in the footnotes. You don't need the underwriting costs (and will almost certainly be immaterial to your analysis).

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