Question

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?

Answer 1

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