{"id":30458,"date":"2021-09-15T13:25:43","date_gmt":"2021-09-15T13:25:43","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=30458"},"modified":"2026-09-01T19:46:13","modified_gmt":"2026-09-01T19:46:13","slug":"cost-of-noncallable-nonconvertible-preferred-stock","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-issuers\/cost-of-noncallable-nonconvertible-preferred-stock\/","title":{"rendered":"Cost of Noncallable, Nonconvertible Preferred Stock"},"content":{"rendered":"\n<iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/HkoJ_nedolg?si=kGrvjJRKCUnhDTzD\" 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\n<p class=\"wp-block-paragraph\">\nA 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. It 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\n\n\n<div style=\"margin: 18px 0;\">\n  <a href=\"https:\/\/analystprep.com\/free-trial\/\"\n     target=\"_blank\"\n     rel=\"noopener noreferrer\"\n     style=\"display: block; text-align: center; padding: 14px 18px; border: 2px solid #1a73e8; border-radius: 18px; color: #ffffff; font-weight: 600; font-size: 16px; text-decoration: none; background-color: #1a73e8;\">\n    Master preferred stock valuation with our Free Trial.\n  <\/a>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Cost of Noncallable, Nonconvertible Preferred Stock<\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">$$ { P }_{ p }=\\frac { { D }_{ p } }{ { r }_{ p } } $$<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Where:<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><em>P<sub>p<\/sub><\/em> = The current price per share of the preferred stock.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><em>D<sub>p<\/sub><\/em> = The preferred stock\u2019s dividend per share.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><em>r<sub>p<\/sub><\/em> = The cost of the preferred stock.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Rearranging the equation to make <em>r<sub>p<\/sub><\/em>&nbsp;the subject, the cost of preferred stock is:<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">$$ r_{ p }=\\frac { { D }_{ p } }{ { P }_{ p } } $$<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">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. To do this, we simply divide the preferred stock\u2019s dividend per share by its current price per share.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Remember that the dividend paid on preferred stock is not tax-deductible. Therefore, there is no need to make any adjustments for taxes.<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<h3 class=\"wp-block-heading\"><strong>Question<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">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\n\n\n<ol class=\"wp-block-list\">\n<li>4.61%.<\/li>\n\n\n\n<li>7.10%.<\/li>\n\n\n\n<li>7.24%.<\/li>\n<\/ol>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Solution<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The correct answer is <strong>B<\/strong>.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Using the formula:<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">$$ r_{ p }=\\frac { { D }_{ p } }{ { P }_{ p } } $$<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The cost of preferred stock = $7.24\/$102 = 7.10%.<\/p>\n<\/blockquote>\n\n\n\n<div class=\"notes_inv\">\n<hr>\n<\/div>\n\n\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"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    \"text\": \"Options:\\nA. 4.61%.\\nB. 7.10%.\\nC. 7.24%.\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is B. The cost of preferred stock is calculated as the annual preferred dividend divided by the current market price of the preferred stock: rp = Dp \/ Pp. Therefore, rp = $7.24 \/ $102 = 0.0710, or 7.10%. The 35% marginal tax rate does not affect the cost of preferred stock because preferred stock dividends are not tax-deductible to the issuing company.\"\n    }\n  }\n}\n<\/script>\n\n\n\n<div style=\"text-align: center; margin: 30px 0;\">\n  <a href=\"https:\/\/analystprep.com\/free-trial\/\"\n     target=\"_blank\"\n     rel=\"noopener noreferrer\"\n     style=\"display: inline-flex; align-items: center; justify-content: center; padding: 12px 26px; border-radius: 9999px; background: #1e5bd8; color: #ffffff; font-weight: bold; text-decoration: none;\">\n    Start Free Trial \u2192\n  <\/a>\n  <p style=\"margin-top: 12px; font-size: 16px; line-height: 1.5;\">\n    Master the cost of noncallable, nonconvertible preferred stock, preferred stock valuation, required returns, and corporate finance concepts with our CFA Level I study materials and practice tools.\n  <\/p>\n<\/div>\n","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":15,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[25],"tags":[],"class_list":["post-30458","post","type-post","status-publish","format-standard","hentry","category-corporate-issuers","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v28.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Cost of Noncallable Preferred Stock | AnalystPrep CFA 1<\/title>\n<meta name=\"description\" content=\"Learn the cost of preferred stock, noncallable preferred stock pricing, and why preferred dividends are not tax deductible for CFA\" \/>\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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