Question

Weir inc.'s perpetual preferred stock sells for $97.50 per share, and it pays an $8.50 annual dividend. if the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. what is the company's cost of preferred stock for use in calculating the wacc? hint: see textbook on how to adjust a stock price for floatation costs; they show it for common shares if not for preferred.

Answer 1

We can use the PV of perpetuity formula as the dividends will be paid for the infinite period of time. But we need to do a small adjustment for floatation cost. Following formula can be applied:

Cost of preferred stock = Annual Dividend / (Price x (1- flotation cost %))

= 8.50 / ( 97.50 x (1- 0.04))

= 8.50/93.60

= 9.08%