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%