Question

Travis Industries plans to issue perpetual preferred stock with an $11.00 dividend. The stock is currently selling for $107.50, but flotation costs will be 9% of the market price, so the net price will be $97.83 per share. What is the cost of the preferred stock, including flotation

Answer 1

Answer:

11.24%

Explanation:

Calculation for the cost of the preferred stock, including flotation

Using this formula

Cost of preferred stock = Annual dividend/Current Market price

Where,

Annual dividend =$11.00

Current Market price=$97.83

Let plug in the formula

Cost of preferred stock = $11.00/$97.83

Cost of preferred stock = 11.24%

Therefore the cost of the preferred stock, including flotation will be 11.24%