Question

long pond inc plans to issue some $70 par preferred stock with a 5% dividend. a similar stock is selling on the market for $85. long pond must pay flotation costs of 7% of the issue price. what is the cost of the preferred stock?

Answer 1

To find the cost of the preferred stock, calculate the annual dividend per share and factor in the net proceeds from issuing the stock after accounting for flotation costs, resulting in a cost of preferred stock of 4.43% for Long Pond Inc.

• The cost of the preferred stock for Long Pond Inc can be calculated by taking into account the dividend to be paid and the net proceeds from the issue after flotation costs.
• The annual dividend per share is 5% of the $70 par value, which yields $3.50 ($70 * 0.05).
• However, the company will sell the stock at $85 per share but will have to pay flotation costs of 7% on this price.
• The flotation costs amount to $5.95 per share ($85 * 0.07).
• This reduces the net proceeds from the sale of each share to $79.05 ($85 - $5.95).
• To calculate the cost of preferred stock, we divide the annual dividend by the net proceeds per share.
• Thus, the cost of preferred stock for Long Pond Inc is $3.50 / $79.05 = 0.0443 or 4.43%.