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Preferred Stock

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Joliet Junior College
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Preferred Stock
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Preferred Stock
Companies source funds from investors using different capital structures. Preferred stock
is a hybrid security that companies may use to acquire funds to finance developments and
projects. Investors purchase preferred stocks, and they earn dividends but have no voting rights.
Preferred stocks are beneficial for companies due to the certain tax benefits they accrue and
capital.
Companies can determine the financing earned from the preferred stocks. The cost of
preferred stock is the rate of return required to be earned on the stockholders’ investment of the
company’s preferred stock to achieve(Keown et al., 2020). Cost is calculated using the price of
preferred stock share and stock dividend earnings per share. In addition, flotation costs are
accounted for since they are incurred during sales of new preferred shares (Keown et al., 2020).
Hence, the formula is:
Cost of a share of preferred stock =
preferred stock dividend
the required rate of the preferred stockholder (rps)
For instance, from the Wall Street Journal market reports, the Bank of America, on 15
th
July 2021, closed the share price at $38.83. The dividend per share is $2.29. The cost of capital
raised by the company is: =$2.29/$38.83=0.06=6%
For preferred stocks, they have a par value, and dividends are fixed in amount for each
period. These traits are similar to bonds. A dividend payment is scheduled for a particular time
and is a designated amount each period that is not subject to changes with a company’s profits.
However, the prices might change, influenced by the business’s fluctuation of interest or state.
Like common stocks, preferred stocks have no fixed maturity date that has an unlimited life.
Also, in instances where entities fail to pay dividends due to low profits, bankruptcy is not

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1 Preferred Stock Student’s name Institution affiliation Course Instructor Due date 2 Preferred Stock Companies source funds from investors using different capital structures. Preferred stock is a hybrid security that companies may use to acquire funds to finance developments and projects. Investors purchase preferred stocks, and they earn dividends but have no voting rights. Preferred stocks are beneficial for companies due to the certain tax benefits they accrue and capital. Companies can determine the financing earned from the preferred stocks. The cost of preferred stock is “the rate of return required to be earned on the stockholders’ investment of the company’s preferred stock to achieve” (Keown et al., 2020). Cost is calculated using the price of preferred stock share and stock dividend earnings per share. In addition, flotation costs are accounted for since they are incurred during sales of new preferred shares (Keown et al., 2020). Hence, the formula is: preferred stock dividend Cost of a share of preferred stock = the required rate of the preferred stockholder (rps) For instance, from the Wall Street Journal market reports, the Bank of America, on 15th Jul ...
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