Question

Consider the case of Bogdan Enterprises:

At the present time, Bogdan Enterprises does not have any preferred stock outstanding but is looking to include preferred stock in its capital structure in the future. Bogdan has found some institutional investors that are willing to purchase its preferred stock issue provided that it pays a perpetual dividend of $10 per share. If the investors pay $110.22 per share for their investment, then Bogdan's cost of preferred stock (rounded to four decimal places) will be:________.
a. 8.6165%
b. 9.0700%
c. 8.163090
d. 9.5235%

Answer 1

b. 9.0700

Step-by-step explanation:

Calculation to determine Bogdan's cost of preferred stock will be:

Using this formula

Cost of preferred stock = Annual dividend / Current price

Let plug in the formula

Cost of preferred stock = $10.00 / $110.22

Cost of preferred stock = 0.0907*100

Cost of preferred stock = 9.0700%

Therefore Bogdan's cost of preferred stock will be:9.0700%