Question

A Company’s perpetual preferred stock sells for $102.50 per share, and pays a $9.50 annual dividend. If the company were to issue a new preferred issue, a flotation cost of 4.00% would be paid to the investment bankers. What is the company's cost of issuing new preferred stock?

Answer 1

9.65%

Step-by-step explanation:

Data provided in the question:

Price per share = $102.50

Annual dividend paid = $9.50

Flotation cost = 4.00%

Now,

Company's cost of issuing new preferred stock

= ( Dividend Paid ) ÷ [ Price per share × ( 1 - Flotation cost) ]

= $9.50 ÷ [ $102.50 × ( 1 - 0.04 ) ]

= $9.50 ÷ 98.4

= 0.0965

or

= 0.0965 × 100% = 9.65%