Question

Klieman Company’s perpetual preferred stock sells for $86 per share and pays a $10 annual dividend per share. If the company were to sell a new preferred issue, it would incur a flotation cost of 5.4% of the price paid by investors. What is the company's cost of preferred stock?

12.29%

11.79%

11.29%

12.79%

13.29%

Answer 1

Step-by-step explanation:

To calculate the cost of preferred stock, we use the formula:

Cost of Preferred Stock (Kps) = Dividend Payment / Net Proceeds per Share

Where:

Dividend Payment = Annual dividend per share = $10

Net Proceeds per Share = Price paid by investors - Flotation cost

Given:

Price paid by investors = $86

Flotation cost = 5.4% of $86 = 0.054 * $86 = $4.644

Net Proceeds per Share = $86 - $4.644 = $81.356

Now, plug the values into the formula:

Cost of Preferred Stock (Kps) = $10 / $81.356 ≈ 0.1229

Multiply by 100 to convert to a percentage:

Cost of Preferred Stock (Kps) ≈ 12.29%

So, the company's cost of preferred stock is approximately 12.29%. Therefore, the correct option is:

A. 12.29%