Final answer:
The cost of preferred stock with flotation costs can be calculated by subtracting the flotation costs from the market price, and then dividing the annual dividend by the adjusted market price. In this case, the cost of preferred stock is 5.645%.
Step-by-step explanation:
The cost of preferred stock with flotation costs can be calculated by considering the dividend rate and the stock price in the market. In this case, Burnwood Tech plans to issue preferred stock with a $50 par value and a 7% dividend rate. The market price of a similar stock is $65. To account for flotation costs, which are the expenses associated with issuing the stock, we need to adjust the cost of preferred stock. One common method is to subtract the flotation costs from the market price. For example, if the flotation costs amount to $3 per share, the adjusted market price would be $65 - $3 = $62. Then, the cost of preferred stock can be calculated by dividing the annual dividend by the adjusted market price. In this case, the annual dividend is 7% of the par value, which is $50. Therefore, the cost of preferred stock is (0.07 * $50) / $62 = 0.05645 or 5.645%.