Question

Milton Corporation gives the preferred stockholders an annual dividend of $5 per share. Each share of stock sells for $100 and selling costs of $3. What is the company's cost of preferred stock

Answer 1

Answer:

Milton Corporation

The company's cost of preferred stock is:

= 5.2%.

Explanation:

a) Data and Calculations:

Annual dividend per share = $5

Selling price of preferred stock = $100

Flotation cost per share = $3

The Company's cost of preferred stock, using the flotation cost is = Dividend per share/(Selling price - Flotation cost per share)

= $5/($100 - $3)

= $5/$97

= 0.052

= 5.2%

If the flotation cost was not incurred in the current period, the cost of preferred stock will be = $5/$100 = 0.05 = 5%