Question

"A company's perpetual preferred stock currently sells for $105,000 per share, and it pays an $8.00 annual dividend. If the company were to sell a new preferred issue, it would incur a floatation cost of 5.00% of the issue price. What is the firm's cost of preferred stock

Answer 1

Answer:

8.02%

Explanation:

The computation of the cost of preferred stock is shown below:

Cost of preferred stock = Annual dividend ÷ Preferred stock price after taking the flotation cost

where,

The Annual dividend is $8

And, preferred stock price taking the flotation cost is

= $105 - $105 × 5%

= $105 - $5.25

= $99.75

So, the firm cost of preferred stock is

= $8 ÷ $99.75 × 100

= 8.02%

The current share price is $105 per share not the $105,000 per share

We simply applied the above formula