Question

"cost of preferred stock taylor systems has just issued preferred stock. the stock has a 12% annual dividend and a $100 par value and was sold at $97.50 per share. in addition, flotation costs of $2.50 per share must be paid.
a. calculate the cost of the preferred stock.
b. if the firm sells the preferred stock with a 10% annual dividend and nets $90.00 after flotation costs, what is its cost?"

Answer 1

a. The cost of preferred stock = D1/P0

where D1 = 100* 12% = $12

P0 = $97.50

Cost of preferred stock = $12/97.50

= 12.31%

b. Cost of preferred stock, if the price net of flotation cost is $90 and Dividend paid is 10% annual dividend

Dividend (D0) = 100*10% = $10

Cost of Preferred Stock = D0/P0

= $10/$90

= 0.11 or 11.11%