Answer: 8.6%.

## Explanation The cost of preferred equity is calculated using the formula: \[ r_p = \frac{D_p}{P_p} \] Where: - \( r_p \) = cost of preferred equity - \( D_p \) = annual preferred dividend - \( P_p \) = current market price per share **Step 1: Calculate the annual dividend** \[ D_p = \text{Par value} \times \text{Dividend rate} = \$150 \times 8.0\% = \$150 \times 0.08 = \$12 \] **Step 2: Calculate the cost of preferred equity** \[ r_p = \frac{\$12}{\$140} = 0.0857 \text{ or } 8.57\% \] **Step 3: Compare with options** - 8.57% is closest to **8.6%** (Option C) **Key Points:** - The dividend is based on the **par value** ($150), not the market price - The cost is calculated using the **current market price** ($140) - When preferred stock trades above par value, the cost is lower than the dividend rate - When preferred stock trades below par value, the cost is higher than the dividend rate In this case, since the stock trades below par ($140 < $150), the cost (8.57%) is higher than the dividend rate (8.0%).

Author: LeetQuiz .