{"id":1544,"date":"2019-09-12T13:33:00","date_gmt":"2019-09-12T13:33:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=1544"},"modified":"2026-03-19T19:38:52","modified_gmt":"2026-03-19T19:38:52","slug":"cost-noncallable-nonconvertible-preferred-stock","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/cost-noncallable-nonconvertible-preferred-stock\/","title":{"rendered":"Noncallable, Nonconvertible Preferred Stock"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Cost of Capital (2021 Level I CFA\u00ae Exam \u2013 Reading 33)\",\n  \"description\": \"This video lesson covers the concept of cost of capital, explaining how to interpret and calculate the weighted average cost of capital (WACC). It explores how taxes impact capital costs, the marginal cost of capital, and how to determine the optimal capital budget. Additionally, it covers methods for calculating the cost of debt and equity.\",\n  \"uploadDate\": \"2018-10-21T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/i.ytimg.com\/vi\/I_SgGrDv1YM\/hqdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=I_SgGrDv1YM\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/I_SgGrDv1YM\",\n  \"duration\": \"PT33M52S\"\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Estimate cost of preferred stock given price and dividend\",\n    \"text\": \"Company D issues fixed-rate, noncallable, nonconvertible preferred stock priced at $102 and paying dividends of $7.24. Company D\u2019s marginal tax rate is 35%. What is the estimate of Company D\u2019s cost of preferred stock?\\n\\nA. 4.61%\\n\\nB. 7.10%\\n\\nC. 7.24%\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is B.\\n\\nCost of preferred stock = Dividend \/ Price = 7.24 \/ 102 = 7.10%.\"\n    }\n  }\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/I_SgGrDv1YM?si=7y9TK1JSoieEeJVZ\" title=\"YouTube video player\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n\n\n<p>A preferred stock that does not give its holder the right to convert their preferred shares into a fixed number of common shares, usually after a predetermined date, is called a nonconvertible preferred stock. A noncallable, nonconvertible preferred stock is a nonconvertible preferred stock that does not give the issuer the right to call in or redeem the preferred stock at a preset price after a predetermined date.<\/p>\n<h2><strong>Cost of Noncallable, Nonconvertible Preferred Stock<\/strong><\/h2>\n<p>$$ { P }_{ p }=\\frac { { D }_{ p } }{ { r }_{ p } } $$<\/p>\n<p>Where:<\/p>\n<p><em>P<sub>p<\/sub><\/em> = the current price per share of the preferred stock<\/p>\n<p><em>D<sub>p<\/sub><\/em> = the preferred stock\u2019s dividend per share<\/p>\n<p><em>r<sub>p<\/sub><\/em> = the cost of the preferred stock<\/p>\n<p>Rearranging the equation to make <em>r<sub>p<\/sub><\/em>\u00a0the subject, the cost of preferred stock is:<\/p>\n<p>$$ r_{ p }=\\frac { { D }_{ p } }{ { P }_{ p } } $$<\/p>\n<p>In other words, if we know how much dividend a preferred stock pays as well as the current price of the preferred stock, we can obtain the cost of the preferred stock by simply dividing the preferred stock\u2019s dividend per share by its current price per share.<\/p>\n<p>Remember that the dividend paid on preferred stock is not tax-deductible. Therefore, there is no need to make any adjustment for taxes.<\/p>\n<blockquote>\n<h2><strong>Question<\/strong><\/h2>\n<p>Company D issues fixed-rate, noncallable, nonconvertible preferred stock priced at $102 and paying dividends of $7.24. Company D\u2019s marginal tax rate is 35%. What is the estimate of company D\u2019s cost of preferred stock?<\/p>\n<p>A. 4.61%<\/p>\n<p>B. 7.10%<\/p>\n<p>C. 7.24%<\/p>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is B.<\/p>\n<p>Using the formula:<\/p>\n<p>$$ r_{ p }=\\frac { { D }_{ p } }{ { P }_{ p } } $$<\/p>\n<p>The cost of preferred stock = $7.24\/$102 = 7.10%.<\/p>\n<\/blockquote>\n<p><em>Reading 33 LOS 33g:<\/em><\/p>\n<p><em>Calculate and interpret the cost of noncallable, nonconvertible preferred stock<\/em><\/p>\n<div class=\"notes_inv\"><hr \/>\n<p><a href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/learning-sessions-curriculum-corporate-finance\/\"><em>Corporate Finance &#8211; Learning Sessions<\/em><\/a><\/p>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>A preferred stock that does not give its holder the right to convert their preferred shares into a fixed number of common shares, usually after a predetermined date, is called a nonconvertible preferred stock. A noncallable, nonconvertible preferred stock is&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[6],"tags":[],"class_list":["post-1544","post","type-post","status-publish","format-standard","hentry","category-corporate-finance","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Noncallable &amp; Nonconvertible Preferred Stock | CFA Level 1<\/title>\n<meta name=\"description\" content=\"Understand the characteristics of noncallable, nonconvertible preferred stock, including dividend payments and tax implications.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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