Question

Bauer Company’s preferred stock is currently selling at $80 per share and pays an annual dividend of $8 per share. The company will incur 5% flotation cost if they issue new preferred stock. What is Bauer’s cost of preferred stock (with adjustment of flotation costs). (A) 11.05%(B) 10.23%(C) 10.53%(D) 11.81%(E) 10.74%

Answer 1

(C) 10.53%

Step-by-step explanation:

The flotation cost makes the cost of the preferred stock at more flotation because a portion of the proceeds from the share is taken away to pay up the flotation cost.

`r_p = (D)/(P(1-f))`

`r_p = (8)/(80(1-0.05))`

`r_p = (8)/(80(0.95))`

`r_p = (8)/(76)`

`r_p = 0,105263`