Question

LUVFINANCE, Inc. is estimating its WACC. The firm could sell, at par, $100 preferred stock that pays a 10 percent annual dividend and incurs 4.72% flotation costs. What is the cost of new preferred stock financing?

Answer 1

The answer is "10.49%".

Step-by-step explanation:

Preference inventory values are incurred as described below:

Using formula:

`= (Annual \ \ dividend)/( Price * (1 - flotation\ cost) ])`

`= (\$ 10)/([ \$ 100 * (1 - 0.0472) ])\\\\= (\$ 10)/( \$ 100 * (0.9528) )\\\\= (\$ 10)/( \$ 95.28)\\\\=0.10495\\\\=10.49\%`