Question

LUVFINANCE, Inc. is estimating its WACC. The firm could sell, at par, $100 preferred stock that pays a 10 percent annual dividend and incurs 4.72% flotation costs. What is the cost of new preferred stock financing?

Answer 1

Answer:

The answer is "10.49%".

Explanation:

Preference inventory values are incurred as described below:

Using formula:

$= \frac{Annual \ \ dividend}{ Price \times (1 - flotation\ cost) ]}$

$= \frac{\ 10}{[ \ 100 \times (1 - 0.0472) ]}\\\\= \frac{\ 10}{ \ 100 \times (0.9528) }\\\\= \frac{\ 10}{ \ 95.28}\\\\=0.10495\\\\=10.49\%$