Cost of preferred equity
Principles of Finance glossary · Cost of Capital & Capital Structure
Definition
Preferred dividend divided by preferred share price; the required return on preferred equity for WACC.
Cost of preferred equity in plain English
Some companies raise money by selling "preferred" stock, which is a hybrid: like a bond, it promises a fixed dividend (a set yearly payment), but like regular stock, it never has to be paid back. The "cost" here answers one question: what yearly return are these investors effectively demanding? You find it by dividing the fixed dividend by what one share currently sells for — if a share pays $5 a year and trades at $50, that's a 10% cost. Companies track this because that 10% is the real price of using preferred-shareholders' money, and it feeds into their overall cost-of-financing math (WACC).
Practice Cost of preferred equity
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