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fenix001 [56]
3 years ago
5

JPR Company's preferred stock is currently selling for $28.00, and pays a perpetual annual dividend of $2.00 per share. Underwri

ters of a new issue of preferred stock would charge $3 per share in flotation costs. The firm's tax rate is 40%. Compute the cost of new preferred stock for JPR.
Business
1 answer:
scoundrel [369]3 years ago
7 0

Answer:

8%

Explanation:

Data provided in the question

Current selling price of the preferred stock = $28

Annual dividend = $2 per share

Flotation cost = $3 per share

Firm tax rate = 40%

So by considering the above information, the cost of new preferred stock is

= Annual dividend per share ÷ (Current selling price of the preferred stock - Flotation cost)

= $2 ÷ ($28 - $3)

= $2 ÷ $25

= 8%

We simply applied the above formula so that the cost of preferred stock could arrive

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