Question

A company's perpetual preferred stock currently sells for $82 per share, and pays an annual dividend of $3.00. In issuing the preferred shares, the company incurs flotation costs of 13%. The company's cost of preferred stock is _____%

Answer 1

The answer is 4.2%

Step-by-step explanation:

The formula is D/Po(1-f)

Where D is the annual dividend paid

Po is the current price of the preferred stock

f is the floation cost.

So we have;

$3.00/$82(1 - 0.13)

$3.00/$82(0.87)

$3/$71.34

=0.042

Expressed as a percentage

4.2%

Therefore, The company's cost of preferred stock is 4.2%.