Cost of preferred stock. Kyle is raising funds for his company by selling preferred stock. The preferred stock has a par value

Question

3 years ago

6

Cost of preferred stock. Kyle is raising funds for his company by selling preferred stock. The preferred stock has a par value

of $100 and a dividend rate of 6.0%. The stock is selling for $80.00 in the market. Kyle hires Wilson Investment Bankers to sell the preferred stock. Wilson charges a fee of 3% on the sale of preferred stock. What is the cost of preferred stock for Kyle using the investment banker? What is the cost of preferred stock for Kyle using the investment banker?

Business

1 answer:

anyanavicka [17] · Answer 1 · 2022-01-31T10:34:04+03:00

Answer:

7.73%

Explanation:

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

As we know that

Cost of preferred stock = {Annual dividend ÷ (price - flotation cost)} × 100

where,

Annual dividend = 6.0% × $100 = $6

Flotation cost = $80 × 0.03 = $2.4

And, the price is $80

So, the cost of preferred stock is

={$6 ÷ ($80 - $2.4)} × 100

= ($6 ÷ 77.6) × 100

= 7.73%

We simply applied the above formula