A firm’s cost of preferred stock, kp, is the rate of return required by the preferred stock investors. In the case of perpetual preferred stock, the cost is calculated as follows:
kp ¼ Dp Pnet where Dp is the annual preferred dividend and Pnet is the preferred stock price net of issuance costs on new issues. Preferred stock is used relatively infrequently as a source of capital because its after-tax cost is normally significantly greater than that of debt. This is because interest on debt is a tax-deductible expense for the firm, whereas dividends on stock are not.  LO1