Bosio Inc. s perpetual preferred stock sells for $97.50 per share, and it pays an $8.50 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What is the companys cost of preferred stock for use in calculating the WACC?

a. 8.72%

b. 9.08%

c. 9.44%

d. 9.82%

e. 10.22%

b. 9.08%

Explanation:

Cost of preferred stock is the required rate of return by investors for providing capital to a company.

Formula for cost of preferred stock = Dividend / Price * (1-Flotation cost)

Dividend = $8.50

Price = $97.50

Flotation cost = 4% or 0.04 as a decimal

Next, plug in the numbers to the formula;

Cost of preferred stock = 8.50 / [97.50 (1-0.04) ]

= 8.50 / 93.6

= 0.0908 or 9.08% as a percentage