The correct answer is D. component cost of preferred stock.
The component cost of preferred stock is the rate of return that a company expects to earn on its preferred stock. It is calculated by dividing the preferred dividend by the preferred stock price, multiplied by (1-floatation cost).
The preferred dividend is the amount of money that the company is obligated to pay to its preferred shareholders each year. The preferred stock price is the price that the company sells its preferred stock for. The flotation cost is the cost of issuing new preferred stock, such as fees paid to investment bankers.
The component cost of preferred stock is used to calculate the weighted average cost of capital (WACC), which is a measure of the cost of capital for a company. The WACC is used to calculate the discount rate for a company’s projects, and it is also used to determine the company’s cost of equity.
Here is a brief explanation of each option:
- Transaction cost of preferred stock: The transaction cost of preferred stock is the cost of buying or selling preferred stock. It includes the commissions paid to brokers, as well as any other fees or taxes associated with the transaction.
- Financing of preferred stock: The financing of preferred stock is the process of raising money by issuing preferred stock. This can be done through a public offering or a private placement.
- Weighted cost of capital: The weighted cost of capital (WACC) is a measure of the cost of capital for a company. It is calculated by taking the weighted average of the company’s cost of debt, cost of equity, and cost of preferred stock.
- Component cost of preferred stock: The component cost of preferred stock is the rate of return that a company expects to earn on its preferred stock. It is calculated by dividing the preferred dividend by the preferred stock price, multiplied by (1-floatation cost).