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Given that preference shares have an expected dividend stream of 20 cents in perpetuity and that...

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Finance

Given that preference shares have an expected dividend stream of20 cents in perpetuity and that the current market price(cum-dividend) of the preference shares is $2.40, calculate thecost of capital(kp) of these preference shares.

For this question, I am not sure why the answer is 9.09% ratherthan 8.33% that ive calculated from 0.2/2.4. Kindly explain.

Answer & Explanation Solved by verified expert
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Information provided:

Preference share dividend= $0.20

Current market price of preference share and dividend= $2.40

Current market price of preference shares= $2.40 – 0.20= $2.20

Cost of preference shares= Preference share dividend/ Current market price of preference shares

                                                 = $0.20/ $2.20

                                                 = 0.0909*100

                                                 = 9.09%

The cost of preference share was not 8.33% since the price of 2.40 includes the market price and preferred dividend. So, dividend needed to be deducted from $2.40 to arrive at the price of the preferred stock.

In case of any query, kindly comment on the solution.
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Given that preference shares have an expected dividend stream of20 cents in perpetuity and that the current market price(cum-dividend) of the preference shares is $2.40, calculate thecost of capital(kp) of these preference shares.For this question, I am not sure why the answer is 9.09% ratherthan 8.33% that ive calculated from 0.2/2.4. Kindly explain.

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