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goblinko [34]
3 years ago
12

Warephase Corporation has preferred stock outstanding. The stock has a 16% dividend rate. The stockâs market price is $80 per sh

are, and its par value is $75. If new shares are issued, the firm will pay $3.50 per share in flotation costs. The corporate tax rate is 21%. What is the companyâs cost of preferred stock financing?
Business
2 answers:
Svetradugi [14.3K]3 years ago
6 0

Answer:

<em>The company cost of preferred stock financing is 15.7%</em>

Explanation:

<em>From the example given, in solving for the company’s cost of preferred stock financing.  Let recall the following,</em>

<em>The first step is to calculate  the annual dividend of the company </em>

<em> Dividend rate x par value</em>

<em>Ware phase Corporation has a dividend rate of 16% stock </em>

<em> Stock market price is =$80</em>

<em>The dividend rate is 16% while par value is $75 </em>

<em> The Annual dividend is 16/100 x 75 = $12 </em>

<em> The next step is using a mathematical approach. </em>

<em> The cost of preferred stock = Annual dividend/(current price - flotation cost) </em>

<em> From the example, the current price is $80 while the flotation cost is $3.5 per share. </em>

<em> Therefore,</em>

<em>The Cost of preferred stock = 12/(80-3.5) </em>

<em> Which is = 12/76.5 = 0.157  or 15.7%</em>

alina1380 [7]3 years ago
5 0

Answer:

The cost of the company’s preferred stock financing is 15.7%

Explanation:

In this question, we are asked to calculate a company’s cost of preferred stock financing.

Firstly, we calculate the annual dividend of the company.

Mathematically, that is equal to dividend rate * par value

From the question, dividend rate is 16% while par value is $75

Thus, Annual dividend is 16/100 * 75 = $12

To get the cost of preferred stock, we employ a mathematical approach.

Mathematically, cost of preferred stock = Annual dividend/(current price - floatation cost)

From the question, current price is $80 while the floatation cost is $3.5 per share.

Cost of preferred stock = 12/(80-3.5)

= 12/76.5 = 0.157

This is same as 15.7%

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