Question

A firm has issued preferred stock at its​ $125 per share par value. The stock will pay a​ $15 annual dividend. The cost of issuing and selling the stock was​ $4 per share. The cost of the preferred stock is​ ________. A. 12 percent B. 12.4 percent C. 7.2 percent D. 15 percent

Answer 1

Answer:

Cost of preferred stock = 12%

correct option is A. 12 percent

Explanation:

given data

preferred stock = $125 per share

annual dividend = $15

cost of issuing and selling = $4 per share

to find out

cost of the preferred stock

solution

we know that Cost of preferred stock is express as

Cost of preferred stock = Annual dividend ÷ (Stock price-Flotation cost)     ...........................1

and we know  Flotation cost will be here = $\frac{4}{125}$ = 3.20 %

so

from equation 1 we get

Cost of preferred stock = Annual dividend ÷ (Stock price-Flotation cost)  

Cost of preferred stock = $15 ÷ ($125 - 3.20 %  )  

Cost of preferred stock = 0.120030

Cost of preferred stock = 12%

correct option is A. 12 percent