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Cost of Preferred Stock Calculator

Enter the par value, dividend rate, and market price to find the cost of preferred stock.

How it is calculated

Preferred shares pay a fixed dividend based on their par (face) value, so the tool first finds the yearly dividend per share: dividend = par × rate / 100, with the rate as a percentage. The cost of preferred stock is that dividend divided by the price at which the share trades now: cost = dividend / market price × 100. The result is a percentage to two decimals, and the dividend and the market price are repeated in dollars. The price must be above zero; par and rate cannot be negative. Flotation (issue) costs are not included, so the figure is the yield on the market price rather than the net cost of raising new capital. Dividends are assumed to be fixed and to continue indefinitely.

Worked example

A preferred share has a par value of $100, a stated dividend rate of 6% and a market price of $92. Annual dividend: 100 × 6 / 100 = $6.00. Cost: 6.00 / 92 × 100 = 6.52%. The tool shows a cost of 6.52% with a dividend of $6.00 and a market price of $92.00. Because the share trades below par, the cost is higher than the 6% stated rate. At a market price of $100 the cost would equal 6.00%.

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Common mistakes

  • Dividing the dividend by the par value instead of the market price. That only returns the stated rate; the cost depends on what investors pay today, so 6/100 would give 6.00% rather than 6.52%.
  • Entering the rate as a decimal such as 0.06. The field is in percent, so 0.06 means 0.06% and the dividend is almost zero.
  • Using the original issue price as the market price. Use the current price, since the share may now trade above or below its issue level.
  • Applying a tax shield. Preferred dividends are generally paid from after-tax profit, and this tool does not reduce the cost for tax as it would for debt.
  • Using the result for preferred shares with variable or participating dividends. The formula assumes a fixed dividend, so it does not fit shares whose payout changes.

Sources

About this calculator

Preferred stock sits between debt and common equity on a company's balance sheet, paying a fixed dividend the way a bond pays fixed interest, which is why its financing cost is calculated the same way a bond yield is: cost of preferred stock = annual dividend ÷ current market price per share, where the annual dividend itself comes from the par value multiplied by the stated dividend rate.

This calculator works through that chain — par value and dividend rate to annual dividend, then annual dividend divided by market price — to arrive at the cost of preferred equity. It's one of the components combined into a company's weighted average cost of capital (WACC), used by corporate finance professionals and analysts to evaluate whether issuing preferred stock is a cheaper or more expensive way to raise capital than debt or common equity.

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Comments (1)

  • Editorial team

    Because preferred dividends are paid from after-tax profit, set this figure beside the after-tax cost of debt, not the pre-tax interest rate, when you build a weighted average cost of capital. The default shows 8.42%, a yield on the price of 95 rather than the stated 8% rate. Would a flotation-cost option make the tool more useful for you?

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