3. The cost of preferred stock

Preferred stock is a hybrid security, because it has some characteristics typical of debt and others typical of equity. The following table lists various characteristics of preferred stock. Determine which of these characteristics is consistent with debt and which is consistent with equity.

a. place a check mark in either debt or equity

Characteristics	Debt	Equity
Dividends are fixed.
Failure to pay a preferred dividend does not send the firm into bankruptcy.

Consider the case of Ferro Enterprises: fill in blank

b. At the present time, Ferro Enterprises does not have any preferred stock outstanding but is looking to include preferred stock in its capital structure in the future. Ferro has found some institutional investors that are willing to purchase its preferred stock issue provided that it pays a perpetual dividend of $15 per share. If the investors pay $142.73 per share for their investment, then Ferros cost of preferred stock (rounded to four decimal places) will be ______%

4. a. The current risk-free rate of return (rRFrRF) is 3.86% while the market risk premium is 6.63%. The Allen Company has a beta of 0.78. Using the capital asset pricing model (CAPM) approach, Allens cost of equity is ______%

b.

The Lincoln Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a companys cost of internal equity. Lincolns bonds yield 10.28%, and the firms analysts estimate that the firms risk premium on its stock over its bonds is 3.55%. Based on the bond-yield-plus-risk-premium approach, Lincolns cost of internal equity is: choose one

16.60%

13.83%

17.29%

13.14%