Question

A company plans to issue new Preferred Stock that pays 6% on the Par Value of $25. Similar preferred stocks are current selling in the market for Pp = $28. If the firm expects flotation costs of 8% per share, then what is the cost of newly issued preferred stock to the firm? The firms tax rate = 40%.

Answer 1

Answer:

The cost of newly issued preferred stock to the firm is 5.82%

Explanation:

Annual dividend = $25 * 6% = $1.5

Present price = $28

Flotation costs = 8% = 8/100 = 0.08

Cost of new stock = Annual dividend / [Current price(1 - flotation costs)]

Cost of new stock = 1.5 / [ 28(1 - 0.08)]

Cost of new stock = 1.5 / [ 28(0.92)]

Cost of new stock = 1.5 / 25.76

Cost of new stock = 0.0582

Cost of new stock = 5.82% (Approx).