Question

Travis Industries plans to issue perpetual preferred stock with an $11.00 dividend. The stock is currently selling for $95.50, but flotation costs will be 10% of the market price, so the net price will be $85.95 per share. What is the cost of the preferred stock, including flotation

Answer 1

The cost of the preferred stock including flotation is 13.37%.

Explanation:

The computation of the cost of the preferred stock is shown below:

= Annual dividend ÷ Price × (1 - flotation cost)

= $11 ÷ 87.50 × (1 - 0.06)

= $11 ÷ $82.25

= 13.37%

Hence, the cost of the preferred stock is 13.37%.

Learn more about flotation here :

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