Cost of Preferred Stock

The cost of preferred stock is the current yield prevailing in the market on newly issued preferred stock of equal risk to that already outstanding. The cost of preferred stock is computed as the preferred dividends divided by the net (of flotation cost) issuing price of the preferred stock. There is no pretax or after-tax cost of preferred stock since preferred dividends are not deductible for income tax purposes. The cost of preferred stock is used to compute the weighted average cost of capital. See also weighted average cost of capital and cost of long-term debt and cost of retained earnings.