Question

A company’s perpetual preferred stock currently sells for $102.50 per share, and it pays 8% annual dividend with a $100 par. If the company were to sell a new preferred issue, it would incur a flotation cost of 5.00% of the issue price. What is the firm's cost of preferred stock?a. 8.22%
b. 9.28%
c. 6.90%
d. 9.53%
e. 7.97%.

Answer 1

Answer: The correct answer is "a. 8,22%".

Explanation:

Preferred stock price is $102.50

Preferred dividend is $8.00

Flotation cost 5.00%

We have to calculate the firm cost of preferred stock with the formula

rp= Dp/(Pp(1 −F))

So = rp = 8 / [102,50 × ( 1 - 0,05)] = 8,22%