Cost of Preferred Stock Calculator
Stop guessing your yield. Calculate the exact cost of preferred stock in seconds.
- Determine Investor Yield
- Calculate Company Issuance Costs
- Compare returns against benchmarks
Standard Corporate Finance Formula.
Enter your dividend and price below.
What Is Cost of Preferred Stock
The cost of preferred stock represents the rate of return required by preferred shareholders to invest in a company. It is essentially the dividend yield on the preferred equity, but from the company's perspective, it acts as the cost of that specific capital financing.
Why It Matters
This metric is a critical component in calculating a company's Weighted Average Cost of Capital (WACC). Because preferred stock is a hybrid security—having features of both equity and debt—understanding its specific cost is vital for accurate project valuation and capital budgeting.
Unlike common stock, preferred stock usually pays a fixed dividend, making the cost calculation more straightforward than estimating the cost of common equity.
Key Components of Preferred Stock Cost
To calculate this metric accurately, you must understand the inputs. It is important to distinguish between the "Investor View" (Market Price) and the "Company View" (Issuance Price).
Annual Dividend (D)
This is the fixed payment made to shareholders annually. It is usually stated as a percentage of the par value (e.g., 5% of $100 par value) or as a fixed dollar amount.
Market Price (P)
The current trading price of the share. Investors should use this to determine current yield. Companies calculating the cost of new stock use the issuance price.
Flotation Costs (F)
These are the fees paid to investment bankers for issuing the stock (underwriting fees). Only issuing companies calculate this; investors buying on the secondary market do not.
The Cost of Preferred Stock Formula
Transparency in finance is essential. The cost of preferred stock is derived from the formula for the present value of a perpetuity, as preferreds generally have no maturity date.
rps = D / P
Where:
- rps = Cost of Preferred Stock
- D = Annual Dividend
- P = Current Market Price (or Net Proceeds if issuing)
Advanced Calculation (Net Proceeds)
If you are a company issuing new stock and using the "Include Issuance Costs" toggle, the formula adjusts to account for flotation costs (F), reducing the net proceeds:
rps = D / [P × (1 - F)]
This results in a higher cost of capital for the company, as the capital raised is effectively less than the market price due to fees.
How to Use the Calculator
- Find the annual dividend amount on the stock quote or prospectus (usually fixed).
- Enter the current market price (or issuance price if calculating for new capital).
- Toggle "Include Issuance Costs" ONLY if you are the company issuing the stock and know the flotation fee percentage.
- Review the calculated annual yield percentage.
- Tip: Use the "Reset" button to clear fields and switch between Investor (Yield) and Company (Cost) views.
Understanding Your Results
The calculated percentage represents the expected return or cost. Interpreting the magnitude of this number is key to investment decisions.
< 4% (Low Yield)
Indicates high credit quality or a "cumulative" feature protecting the dividend. These are often treated like utility bonds.
4% – 7% (Standard)
The typical range for established corporate preferreds. Offers a balance of yield and risk for income investors.
> 7% (High Yield)
Indicates higher risk, potential for call risk, or trading below par value. Requires careful due diligence.
Action Step
Compare this rate to the company's bond yields and the cost of common equity. If the cost of preferred stock is significantly higher than the bond yield, the company is paying a premium for the flexibility of preferred payments.
Preferred Stock vs. Other Securities
Understanding where preferred stock sits in the capital structure helps contextualize its cost.
| Feature | Preferred Stock | Common Stock | Bonds (Debt) |
|---|---|---|---|
| Priority of Claims | Second (After bonds) | Last | First |
| Dividend Stability | Fixed (Usually) | Variable | Fixed Interest |
| Voting Rights | Generally No | Yes | No |
| Typical Cost | Medium | Highest | Lowest |
Why Preferred Stock Costs Change
The yield (cost) is not static; it fluctuates based on market dynamics.
- Interest Rates: Preferred rates act like bonds. As prevailing interest rates rise, the market price of preferreds drops, pushing the yield up (inverse relationship).
- Credit Ratings: If a company's credit rating is downgraded, the risk of default increases. Investors demand a higher return to hold the stock, increasing the cost.
- Call Provisions: Callable preferreds often have higher yields to compensate investors for reinvestment risk—the risk that the company will redeem the stock when rates fall.
Who Uses This Calculation?
Corporate Finance
Analysts use the Cost of Preferred Stock to calculate the Weighted Average Cost of Capital (WACC). This is essential for project valuation and Net Present Value (NPV) analysis to determine if a new project will generate value.
Income Investors
Investors calculate this yield to determine if the dividend payout justifies the risk compared to safer alternatives like Certificates of Deposit (CDs) or U.S. Treasuries.
Limitations
Frequently Asked Questions
References
We rely on established financial principles for our calculations.
- Corporate Finance Institute (CFI) — Cost of Preferred Stock and WACC formulas.
- Investopedia — General definitions of preferred equity features and hybrid securities.
- Disclaimer: This tool is for educational purposes only and does not constitute financial advice.
About the Author
Nithya Madhavan
Web developer and data researcher creating accurate, easy-to-use calculators across health, finance, education, and construction and more. Works with subject-matter experts to ensure formulas meet trusted standards like WHO, NIH, and ISO.