Question

. Bosio Inc.'s perpetual preferred stock sells for $85.00 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 company's cost of preferred stock for use in calculating the WACC

Answer 1

Answer:

$10.42%

Explanation:

The company's cost of preferred stock for use in calculating the WACC can be derived using the dividend valuation model because it is same as calculating the cost of equity with slight modification.

Dividend valuation model: Kp = Do / Po (ex dividend)

where:

Kp = Cost of Preference shares

Do = current dividend

Po = Price of shares

Note that the flotation cost has to be adjusted against the price of the shares

Hence Kp = $8.5 / $85 (100% - 4%) = 0.104166

Hence, The company's cost of preferred stock for use in calculating the WACC is 10.42%