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Cost of Preferred Stock (Definition, Formula) | Types of Preferred Stock - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
of WallStreetmojo watch the video
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clicking the bell ican friends today we
are going to learn or tutorial on cost
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of the preferred stock we are going to
learn some of the advantages some
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formulas and we'll be discussing few
examples and related to the same now
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I'll show you something that is dividend
history basically of Diana shipping Inc
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can you see over here this is the
extract that is taken from the website
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itself this 8.875% series be cumulative
preferred that is redeemable perpetual
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preference shares over here and the
details is quite visible in right in
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front of us see the cost of the
preferred shares not see the preference
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stock allows an investor's own a stake
at the issuing company with a condition
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that whenever company decides to pay
dividend the holders of the stop will be
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the first to be paid now in this tutorial
will be discussing preferred stock in
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dept and half the cost of the preferred
stock is calculated its formula and it's
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example so let's get into the
nitty-gritty of the same at the very
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first and the very initial stage we need
to learn first that what is preferred
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stock and what is common stock so let's
learn what is preference shareholders
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versus equity share capital see the
capital stock which provides a specific
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dividend that is paid before any
dividends are paid to the common
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stockholders that is known as the equity
share capital and which takes the
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precedence over the common stock in the
event of liquidation the stock is type
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of the class of corporate shares in
which you know the common shareholders
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have not avail any specific rights this
talk comes with the specific rights that
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provides investors preferential status
over the common shareholders
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preferred stockholders usually they
usually have a right to receive the
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dividends before the equity shareholders
that is ESC in our case which means that
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it the PSC that is a preference
stockholders will be paid dividend in
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the first priority I'll just write for
you PSC and over here ESC the point was
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dividend okay now there is a priority
and will the stock is also commonly over
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here known as preferred shares see
preference or stock is also stated as
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basically a quasi debt quasi debt tool
as they are the combination of the
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characteristics of debt and equity both
on one hand to receive dividend at fixed
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rate they carry preferential right over
the ordinary share various in other hand
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they take on the unsecured equity risk
accept to the preferred right on behalf
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of the repayment in occurrence of
winding of the company or organization
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let's learn the types of preferred
shares see other than common stock there
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are variety of the feature of
characteristics that can be added
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additional to the preferred stock in
position either enhance its position or
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attractiveness to the investors or to
make easier and simpler for the issuing
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company to buy back stock or some other
reason
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the first that we are going to learn is
cumulative preferred stock seen case of
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the cumulative preferred stock the
cumulative stock are the shares where
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you know the undeclared dividends
permitted to the accumulate still they
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are paid which means that it has the
right to a particular amount of dividend
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every year if a dividends are not paid
or declared this talk can accumulate the
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dividends unpaid for a future period and
which they are in future period in which
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they have been basically declared now
the another one that is non-cumulative
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preferred stock
that is the second one that is the
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non-cumulative preferred stock
I'm just not writing PS over here see in
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this case you know the non-cumulative stock if the dividends are not available to
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declare in current period then the preference then the preferred stock at the
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face of the situation to lose any kind
of dividend the non-cumulative stock do
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not accumulated any kind of unpaid
evidence it is not utilize the dividend
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in areas on account of the unpaid
dividends the third one is called
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redeemable preference shares now
redeemable stock can be you know can be
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redeemed on or after the period fixed
for their redemption under the terms and
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condition of the issue or after giving a
prior notice for the redemption to
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preference stockholders so the Companies
Act however imposed certain restrictions
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for the redemption of the preference
stock the next one is the opposite of
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the same irredeemable I our PS as decide
for you irredeemable stock are those
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type of stocks or shares which can not
be redeemed during their lifetime of the
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period of the company the fifth one is
the convertible preferred stock that is
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known as CPS in kind in this in this case
basically the convertible stock the
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convertible character provides the
company to transfigure they preferred
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stock into the pre decided number of
shares of the common stock of the
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organization or company at some point of
time in future see the conversion
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feature or characteristics is at first
set at transfusion rate that is not
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fascinating in the eyes of the investors
at the time of the purchase a PI however
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if the cost of the ordinary stock you
know height then the investors can
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transform the ordinary stock and may
then stock will dispose to realize them
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in instant profit now the next one that
is the sixth one that is the non
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convertible preferred stock in this case
the non-convertible stock the holder of
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the non convertible preferred stock have
no such right of the conversion 7 is the
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participating preferred stock the
holders of the participating preferred
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stock have a right to participate in the
surplus of the additional profits of the
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company remaining are remain after
paying dividends to the ordinary shares
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and the preferential attack at a fixed
and there is non-participating
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preferences which is the opposite of
this whereas in case you know in
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non-participating stock the preferred
stock do not have such right to
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participate in the surplus of the
additional profit
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now let's discuss some of the advantages
see the dividend payable on the stock is
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fixed which is usually lower as compared
to the payable or on equity sure as a
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result you know they facility company to
enhancing the profit convenient for the
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dividend available to the equity
shareholders so you can see we hear that
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you know the dividend is basically less
second you know the preferred
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shareholders are having no voting rights
this is the one bad thing on matters
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that are not affecting their right from
now promoters from no promoters or
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management can keep command over the
circumferences of the corporate the
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third one this is basically all this are
basically from the company's point of
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view the corporate or the organization
should continue lemonis in its capital
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structure through issuing the redeemable
preference stock or shares as they will
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be redeemed under the condition of the
issue the fourth one is you can say the
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corporate or the organization should
continue sorry they does not prove or
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state a burden on the finance of the
company because the reason behind this
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is that you know the dividends are paid
only if there is sufficient amount of
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the financial surplus available for the
dividend to be paid the fifth one is you
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can say the non of ability of the
payment of the dividend or preference
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stockholders does not generate a charge
does not generate a charge on the
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company's assets see the issue of the
stock spread or or the range of the
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capital market as they prove provide the
security not only to the investors but
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also to the fix return so if a company
is not able to issue preference stock
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which means that it will it will in
sufficient be insufficient to create the
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attraction for the capital from such
ordinary type of investors now there are
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some disadvantages also of the same just
like you know every coin
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has two sides in a similar fashion there
are some disadvantage related to this
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also see company is to pay the dividends
at a very higher rate on the stock than
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the existing rate of interest on the
debentures see as a result it's
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generally enhances the cost of capital
you can say the cost of capital of the
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company see generally most of the
preferred stocks are assured cumulative
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okay which means that all the areas of
the dividend must be paid just rightful
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are yours must be basically paid on the
first priority before anyone can be paid
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to like equity shoulder so it is the
responsibility of the company to pay
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dividends on such kind of shares which
results in reduction of the profit of
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the equity shareholders the next is
third and that is the issue of the
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preference stock in cubelet you know the
reduction of the equity shareholders the
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affirmed over the assets of the company
because there is a basically a
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preference right available to the
preference stockholder over the asset of
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the company in the winding up case next
is fourth that is you know the debt
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freeness of the company is extremely
influences by it it get influenced by
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the issue of the preferred stock the
creditors may anticipate that the
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continuity of dividend on stock and
adjournment of the dividend on equity
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capital market may divest them with
regarding to the chances of getting back
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there's some amount in full in the
happening of the ending of the company
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so as the preferred capital has the
preference right on the assets of the
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company and the last is you know the
amount of the preferred dividend does
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not affect any reduction on the taxable
income now let's learn what is the cost
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of preferred stock see the cost of the
preferred share capital is basically the
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rate of return which must be earned so
that is the minimum that must be earned
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on the preference capital finance
investments to keep unchanged the
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earnings available to the equity
shareholders in other words cost of
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preferred stock is the basically the
rate of return that the company needs to
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earn anyhow now the cost of irredeemable
preference stock if you see the cost of
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what is right for you
irredeemable preference talk over here
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is is it is basically the rate of the
preference dividend and also it is known
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as the coupon rate dividend by the net
issue proceeds let's now learn and
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understand how to calculate the cost of
the irredeemable preference stock and
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how it is calculated let's see that now
let's learn the cost of the preferred
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stock formula it is cost of the
preferred stock is all the annual
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dividend of the preferred stock divided
by the net proceeds received from the
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issue of the preferred stock the net
proceeds includes everything and you
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know it deducts if any flotation cost
expensive limited over here's an example
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has issued ten thousand irredeemable
preference shares with a face value of
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how much $100 each the cost of
the provincial capital is how much ten
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percent the market price is currently
quoted at 115 so calculate the cost of
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the preference share capital now that's
what they are saying let's see how they
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are calculated the annual dividend is
how much as we know that it is
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calculated in the face value so it is
basically 10%-.100 ne hundred in the
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value into ten percent which is the
preferential cost right
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that gives us how much $10 so the cost
of preferential is going to be the
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amount of the annual dividend divided by
the price per share which gives you a
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cost as 8.75 right
now this was the cost of the
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irredeemable preferential example number
two let's see this is a company that is
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called as ABC Limited that has issued
how much ten thousand irredeemable
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preferences at $150 at a
coupon rate of 14% per annum
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now the flotation cost as we I was just
discussing
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that is
$15 per share so now calculate the
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cost of the preferred share capital the
cost of the preferred share capital or
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KP is going to be how much 14% of
what 14% of the irredeemable
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preferential of $150 each that is 150
minus the flotation cause as I told you
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that means to be deducted and once you
do that what you get is the amount of
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dividend divided by the amount total
share price excluding the flotation cost
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that gives you your total cost of the
preferred stock as 15.5%
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now let's finally learn the cost of the
redeemable preferred stock the cost of
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the redeemable preferred stock is having
a fixed maturity as the name suggests
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because it is redeemable because the
preferred stock formula is given right
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in front of us
the annual dividend okay plus the
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redeemable value minus the sale value
divided by the number of years of the
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redemption okay this is the profit
formula for redeemable preferred stock
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and you divide the hole by the
redemption value plus a in value divided
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by two so you're making it average now
if you go down and see we'll take an
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example D limited has 100 preference
shares redeemable at premium of 10%
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within 15 years of maturity coupon is
20% flotation cost is 5% and the sale
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price is 95 calculate the cost the
preferred stock on the preferential
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these are the details redeemable is 100
plus 10 right as you know it is a
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premium sale value 95 minus 5 flotation
cost annual dividend that is hundred
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into 12% so finally if you put down the
things in the formula that we have just
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discussed you get 13% as your cost of
capital I hope guys you have learned a
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really great concepts in this particular
arena so that's it for this particular
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topic if you have learned and enjoyed
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