The cost of preferred stock is equivalent to the:

• A. Dividend payout ratio
• B. Interest rate on long-term debt
• C. Earnings per share divided by the book value per share
• D. Dividend rate divided by the market price per share

Answer: (D)

Verified step by step guidance

1. Understand the concept of preferred stock: Preferred stock is a type of equity that typically pays a fixed dividend to shareholders, and its cost represents the return required by investors to hold this stock.
2. Identify the formula for the cost of preferred stock: The cost of preferred stock is calculated as the dividend rate divided by the market price per share. This formula reflects the yield investors expect from their investment in preferred stock.
3. Break down the components of the formula: The dividend rate is the annual dividend paid per share, and the market price per share is the current trading price of the preferred stock in the market.
4. Apply the formula: To calculate the cost of preferred stock, divide the annual dividend rate (expressed as a monetary value or percentage) by the market price per share. Use the formula: $\frac{\mathrm{Dividend Rate}}{\mathrm{Market Price Per Share}}$
5. Interpret the result: The outcome represents the cost of preferred stock as a percentage, which indicates the return investors require to invest in the preferred stock.