Introduction:
The cost of preferred stock is something that every business represents in the world as per their directions. It is considered an equity security that defines the characteristics of both equity as well as debt.
Considering the ‘cost of preferred stocks’ as a hybrid instrument, it is possible that such elements do not portray the total ownership of the company and are not selected on unanimous decisions made by the board of directors at all.
The finance professionals see ‘preferred stocks’ as something that has maximum liquidation as they’re convertible, which allows the company to stash them from shareholders in any time of the year for any professional conflict or a reason.
However, such stocks are reverted into common stocks and that’s because of their premium amount. In the nutshell, even the preferred stocks are considered as a debt instead of stereotyping them as an equity which belongs to their shareholders.
How To Calculate The Cost of Preferred Stock?
The finance professionals state that ‘preferred stocks’ are placed somewhere between the stocks and bonds making it a baffling scenario for all those who want to study this variable of accountancy.
However, it has been already stated that preferred stocks are taken as ‘equity securities’ with some characteristics adopted from the debt of the company. These stocks exhibit fixed par value and shareholders are given dividends on that specific rate accordingly.
Formula
RPS = DPS/P-NET
DPS = Preferred Amount of Dividends
P-Net = Net Issuing price
The formula includes the preferred amount of dividends and selling price which ultimately helps is in finding the right cost of preferred stocks accordingly. Moreover, the right equation for finding such a variable is:
RPS = DPS/PNET = Dividend Price/Selling Price (1-Rate of New Share)