cost of preferred stock calculator

How to use this cost of preferred stock calculator

This calculator helps you quickly estimate the return required by investors who buy preferred shares. In corporate finance, this figure is often used as one component of a company’s weighted average cost of capital (WACC).

• Enter the annual preferred dividend per share.
• Enter the current share price (or expected issue price).
• Select whether flotation costs are none, a percentage, or a dollar amount.
• Click Calculate Cost to see cost of preferred stock as a decimal and percentage.

Formula used in the calculator

The cost of preferred stock is usually estimated with this perpetuity-style formula:

k_p = D_p / P_net

• k_p = cost of preferred stock
• D_p = annual preferred dividend per share
• P_net = net proceeds received per share

How flotation costs affect the result

If the company pays underwriting, legal, or issuance fees, then net proceeds are lower than gross price. Lower net proceeds increase the cost of preferred stock.

• If flotation is a percent: P_net = P × (1 − f)
• If flotation is a dollar amount: P_net = P − F

Worked example

Suppose a company issues preferred shares with a $5.00 annual dividend and a market/issue price of $80. If flotation costs are 4%, net proceeds are:

• P_net = 80 × (1 − 0.04) = 76.80
• k_p = 5.00 / 76.80 = 0.0651
• Cost of preferred stock = 6.51%

Without flotation costs, cost would be 5.00 / 80 = 6.25%. This shows why issuance costs matter.

Why the cost of preferred stock matters

The preferred stock cost is a key capital budgeting input. If your expected project return is below your financing cost, value can be destroyed. Finance teams use this value for:

• WACC estimation
• Project discount rates
• Capital structure decisions
• Comparing debt, common equity, and preferred equity financing

Common mistakes to avoid

• Using quarterly dividend instead of annual dividend (annualize first).
• Ignoring flotation costs during new issuance analysis.
• Entering a flotation percentage as a decimal (enter 4, not 0.04, for 4%).
• Confusing dividend rate printed on par value with actual market-based cost.

FAQ

Is cost of preferred stock tax-adjusted like debt?

Usually no. Interest expense on debt may create a tax shield, but preferred dividends are generally not tax-deductible for the issuing company.

Can this be used for existing preferred shares?

Yes. For existing shares, analysts often use current market price and annual dividend to estimate the ongoing required return.

What if the preferred dividend can change?

This basic model assumes a fixed dividend. If payments are variable or include unusual features, a more advanced valuation method is recommended.

This tool is for educational use and quick estimates. For formal valuation, pair it with your company’s full financing assumptions and current market data.