A company's perpetual preferred stock currently sells for $102.50 per share, and it pays an $8.00 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 5.00% of the issue price. What is the firm's cost of preferred stock?

Question

Business

Dolce

6 August, 10:10

A company's perpetual preferred stock currently sells for $102.50 per share, and it pays an $8.00 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 5.00% of the issue price. What is the firm's cost of preferred stock?

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Answers (2)

Know the Answer?

Carleigh Rush · Answer 1

8.21%

Explanation:

We can calculate this by the simple formula:

Price * (1 - Flotation cost) = Dividend/Cost of Pref. stock

Hence the formula turns into:

Cost of Pref. stock = Dividend / Price * (1 - Flotation costs)

Cost of Pref. Stock = 8 / 102.50 * (1 - 0.05)

Cost of Pref. Stock = 8.21%

Hope this clear things up.

Good luck and cheers.

Alana Shannon · Answer 2

9.10%

Explanation:

The formular for finding the cost of preferred stock is:

rp=Dp / (Pp (1-F))

Preffered stock price (Pp) = $92.50

Preferred dividend (Dp) = $8.00

Flotation cost (F) = 5%

5*100

=0.05

Therefore,

rp = 8.00 / (92.50 (1-0.05))

rp = 8.00 / (92.50 (0.95))

rp = 8.00/87.87

rp = 0.0910*100

rp = 9.10%

Thus, the cost of preferred stock is 9.10%