Which is a characteristic of the cost of preferred stock?
A) Preferred stock dividends are fixed,they are tax deductible.
B) Preferred stock has no maturity,the cost analysis is similar to that of debt.
C) Preferred stock is valued as a perpetuity.
D) The price earnings ratio stays the same.

Question

Quizplus · Accepted Answer

The cost of preferred stock is based on the fixed dividend and the current market value of the security. Preferred stock is typically viewed as a perpetuity because there is no set maturity date. Therefore, the cost of preferred stock is based on the perpetuity formula, which is Discounted Cash Flow (DCF) model. The other options are incorrect because preferred stock dividends are not tax deductible, the cost analysis is not the same as debt since preferred stock has no maturity and the price earnings ratio may vary.

Which Is a Characteristic of the Cost of Preferred Stock