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Kassidy's Kabob House has preferred stock outstanding that pays a dividend of $5 at the end of each year. The preferred sells for $50 a share. What is the stock's required rate of return? Assume the market is in equilibrium with the required return equal to the expected return.

Answer :

Cost of Preferred stock is 10% in this case.

Provided that the preferred stock would sell for $50 per share and that the corporation is required to pay a $5 dividend at the end of each year. As a result, Kassidy's Kabob House must incur a $5 annual cost in order to raise $50.

Because the preferred dividend would be adjusted after the tax cut, the tax rate has no effect on the cost. Cost of Preferred stock is equal to preferred dividend divided by price of preferred stock.

Cost of Preferred stock = 5/50

On solving the above we get, Cost of Preferred stock = 10%

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