The Cost of Preferred Stock Calculator is a practical tool used to determine the rate a company effectively pays to issue its preferred shares. Investors and financial analysts rely on this calculation to evaluate a company’s financial structure and capital efficiency.
Formula
The formula to calculate the cost of preferred stock is: Cost of Preferred Stock (CPS) = Dividend Per Share (DPS) divided by Price Per Share (PPS), multiplied by 100.
How to Use
To use the calculator, input the dividend paid per share (DPS) and the current price per share (PPS). Then click the “Calculate” button to get the cost of preferred stock expressed as a percentage.
Example
Imagine a company pays an annual dividend of $4 per share, and the current share price is $80. Using the formula, CPS = 4 / 80 * 100 = 5%. This means the company pays 5% annually on its preferred stock.
FAQs
1. What is the cost of preferred stock?
It is the rate of return required by investors who purchase a company’s preferred shares.
2. Why calculate the cost of preferred stock?
It helps businesses evaluate the cost of equity financing.
3. Are preferred dividends fixed?
Yes, preferred stock typically has a fixed dividend.
4. What inputs are needed for the calculator?
You need the dividend per share and the price per share.
5. Can this be used for callable preferred stock?
Yes, but only if call provisions are not exercised.
6. What does a high CPS indicate?
It suggests higher financing costs for the company.
7. Is CPS included in WACC calculations?
Yes, it’s part of the weighted average cost of capital.
8. Can the cost of preferred stock be negative?
No, both DPS and PPS must be positive values.
9. Do preferred shareholders get voting rights?
Generally, no. They have priority for dividends but not votes.
10. How often should I update CPS values?
Whenever the market price or dividend changes significantly.
11. Is PPS the issue price or market price?
Usually, the market price is used for current cost evaluations.
12. Is this calculator good for international stocks?
Yes, if currency is consistent across inputs.
13. What happens if PPS is zero?
The calculator will show an error since division by zero is invalid.
14. Is CPS useful for personal investing?
Yes, it helps assess return on preferred stock investments.
15. Does inflation affect CPS?
Indirectly, as it can influence investor expectations and prices.
16. Should I compare CPS with bond yields?
Yes, especially when choosing between debt and equity investment.
17. What sectors issue preferred stock commonly?
Financial institutions and utilities are frequent issuers.
18. Can CPS help in stock valuation?
It provides insight but should be combined with other metrics.
19. What if the dividend changes yearly?
Use the most recent or expected annual dividend for accuracy.
20. Can the calculator be used for REIT preferred shares?
Yes, as long as the dividend and price inputs are available.
Conclusion
Understanding the cost of preferred stock is essential for strategic financial planning. Whether you’re a corporate finance manager or an investor, this calculator simplifies complex calculations and offers quick insights into the financial cost of equity raised through preferred shares.