Burnwood Tech plans to issue some $50 par preferred stock with a 8% dividend. A similar stock is selling on the market for $65.
Burnwood must pay flotation costs of 6% of the issue price. What is the cost of the preferred stock? Round your answer to two decimal places.
1 answer:
Answer:
6.5%
Step-by-step explanation:
The formular used to calculate the cost of preferred stock is:
= Fixed dividend/Net proceeds
Fixed dividend= $50 × 8/100
= $50×0.08
=$4
Net proceeds= Market price-Flotation costs
= $65-(6/100×$65)
= $65-(0.06×$65)
= $65-3.9
= $61.1
Therefore cost of preferred stock is
= 4/61.1 ×100
= 0.065×100
= 6.5%
Hence the cost of preferred stock is 6.5%
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