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3 July, 19:09

Hettenhouse Company's perpetual preferred stock sells for $102.50 per share, and it pays a $9.50 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 company's cost of preferred stock for use in calculating the WACC?

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  1. 3 July, 21:46
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    The company's cost of preferred stock for use in calculating the WACC is 9.65%

    Explanation:

    For computing the cost of preferred stock, the following formula should be used which is shown below

    = Annual dividend based on preferred stock : (Price per share * Flotation cost)

    where,

    Flotation cost = 1 - rate

    = 1 - 4% = 0.96

    = $9.50 : ($102.50 * 0.96)

    = $9.50 : $98.4

    = 9.65%

    The flotation cost should be deducted because it is a one time expense. Thus, it would be minus from price per share.

    Hence, the company's cost of preferred stock for use in calculating the WACC is 9.65%
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Home » Business » Hettenhouse Company's perpetual preferred stock sells for $102.50 per share, and it pays a $9.50 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.
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