When calculating the cost of preferred stock, what must be considered alongside the dividend?

To calculate the cost of preferred stock accurately, it is crucial to consider flotation costs alongside the dividend. Flotation costs refer to the expenses associated with issuing new preferred stock, which can include underwriting fees, legal expenses, and regulatory costs. These costs increase the overall cost of raising capital through preferred stock issuance because they reduce the net proceeds received by the company from the stock sale.

When calculating the cost of preferred stock, the formula typically includes the dividend divided by the net proceeds per share (which would be affected by the flotation costs). Therefore, if a company fails to account for flotation costs, it may underestimate the actual cost of capital associated with the preferred stock, leading to potentially flawed financial decision-making.

While tax rates, market conditions, and future earnings potential are important considerations in broader financial contexts, they do not directly affect the specific calculation of preferred stock costs in the same way that flotation costs do.