Question

Consider the case of Purple Lemon Fruit Company: Ten years ago, Purple Lemon Fruit Company issued a perpetual preferred stock issue-called PS Alpha-that pays a fixed dividend of $6.50 per share and currently sells for $100 per share. Purple Lemon's management team is considering issuing a second issue of perpetual preferred stock. If the new issue tentatively called PS Beta-is actually sold, the company will incur an underwriting (or flotation) cost of 4.70%. In addition, the underwriters are anticipating the need to pay a dividend of $17.50 per share to attract new investors, and is expecting to sell the new shares for $95.00 per share As a component in Purple Lemon's weighted average cost of capital, PS Alpha shares currently exhibit a cost of: 4.88% 8.13% O 7.48% 6.50%

Answer 1

Alpha shares currently exhibit a cost of 6.50%

Step-by-step explanation:

According to the following formula, consider the calculation:

Cost of preferred stock = Annual dividend / (Price - flotation cost)

PS Alpha =6.5/100

6.50%

Alpha shares currently exhibit a cost of 6.50%