Question

A company's perpetual preferred stock currently trades at $87.50 per share, and it pays an $8.00 annual dividend. IF the company were to sell a new preferred issue, it would incur a floattion cost eof 5.00% of the issue price. What is the firm's cost of preferred stock?

Answer 1

Answer: The correct answer is 9,62%.

Explanation: To know how much it costs to issue preferred shares to the company, we must use the formula:

`(Div)/(Price - Floattion  cost)`

Applying the formula with the statement data:

`(8)/(87,50 . (1-0,05))` = 0,0962 = 9,62%.