Completes the third leg of the WACC trio alongside cost of debt and cost of equity — but unlike debt interest, preferred dividends aren’t tax-deductible.
How it works
Annual preferred dividend divided by current preferred share price gives the cost of preferred stock as a percentage.
What this does not include
This assumes a standard, non-convertible, non-participating preferred share — convertible or participating preferred stock features would require a more complex valuation than this simple dividend yield formula.
How to use this calculator
- Enter the annual preferred dividend per share and current preferred share price.
A worked example
An annual dividend of $5 on preferred stock priced at $90: cost of preferred stock = 5 ÷ 90 × 100 = 5.5556%.
What the variables mean
| Variable | Meaning |
|---|---|
| Annual dividend | Fixed annual dividend paid per preferred share |
| Preferred price | Current market price of the preferred share |
Edge cases worth knowing
This is simply the dividend yield, used specifically in cost-of-capital calculations. It represents what the company effectively “pays” to raise capital through preferred stock, a key input alongside cost of debt and cost of equity when computing WACC.
A preferred price of zero makes the cost undefined — there’s no market value to divide the dividend by, so the calculator returns no result.
Frequently asked questions
Why is there no tax adjustment for cost of preferred stock?
Unlike debt interest, preferred dividends are paid out of after-tax income and are not tax-deductible to the issuing company, so no after-tax adjustment applies the way it does for cost of debt.
How is this used in WACC?
The cost of preferred stock is weighted by the proportion of preferred stock in a company’s overall capital structure and combined with the weighted costs of debt and common equity.
Why is preferred stock generally cheaper than common equity but more expensive than debt?
Preferred shareholders rank below debt holders but above common shareholders in a liquidation, and typically receive a fixed dividend — a risk and return profile that usually prices between debt and common equity.
