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18 March, 06:57

A Company's perpetual preferred stock sells for $102.50 per share, and pays a $9.50 annual dividend. If the company were to issue a new preferred issue, a flotation cost of 4.00% would be paid to the investment bankers. What is the company's cost of issuing new preferred stock?

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  1. 18 March, 10:53
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    9.65%

    Explanation:

    Data provided in the question:

    Price per share = $102.50

    Annual dividend paid = $9.50

    Flotation cost = 4.00%

    Now,

    Company's cost of issuing new preferred stock

    = (Dividend Paid) : [ Price per share * (1 - Flotation cost) ]

    = $9.50 : [ $102.50 * (1 - 0.04) ]

    = $9.50 : 98.4

    = 0.0965

    or

    = 0.0965 * 100% = 9.65%
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