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How to calculate the cost of preferred stock?

The cost of preferred stock is also known as the dividends distributed to preferred shareholders. Remember, preferred shareholders are guaranteed an annual dividend, and if the company doesn’t have the funds to pay a dividend in the current year, it will accumulate and be paid in the following year. For the BEC section of the CPA exam, you need to understand how to calculate the cost of preferred stock as this is an input to calculating the company’s weighted average cost of capital (WACC).

Preferred stock dividends – Represents the guaranteed dividend paid to preferred shareholders. A growth rate can be included in the part of the formula.

Net proceeds from issuance of preferred stock – Net proceeds of preferred stock are proceeds that the company earns based on the issuance (sale) price, less the cost to issue the preferred stock.

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