Question

At the present time, Bogdan Enterprises does not have any preferred stock outstanding but is looking to include preferred stock in its capital structure in the future. Bogdan has found some institutional investors that are willing to purchase its preferred stock issue provided that it pays a perpetual dividend of $15 per share. If the investors pay $145.23 per share for their investment, then Bogdan’s cost of preferred stock (rounded to four decimal places) will be

A. 7.7095%
B. 9.0700%
C. 8.163%
D. 9.9770%

Answer 1

10.3284%

Step-by-step explanation:

The computation of the cost of preferred stock is shown below:

Cost of preferred stock = Annual dividend ÷ Price of preferred stock per share

= $15 ÷ $145.23

= 10.3284%

Simply we divide the annual dividend by the price of preferred stock per share so that the correct cost of preferred stock can be computed

Note: This is the correct answer which is not given in the options