Question

A company’s investment bankers say that a proposed new issue of 7.5 percent cumulative preferred stock with a par value of $10 a share can be sold to the public for $27 a share. The transaction costs will be $1 a share. What is the company’s cost of preferred stock financing?

Answer 1

Answer:

The Answer is as follows;

Explanation:

Dividend on preferred stocks=$10*7.5%=$.075

Transaction Costs=$1

Total financing Cost=$1.75

Which is 17.5% (1.75/10)

The market price is not relevant for company's cost of financing. Therefore we have taken dividend payable on face value and transaction costs of issue for purpose of determination of financing cost.