Question

Warephase Corporation has preferred stock outstanding. The stock has a 16% dividend rate. The stock’s market price is $80 per share, and its par value is $75. If new shares are issued, the firm will pay $3.50 per share in flotation costs. The corporate tax rate is 21%. What is the company’s cost of preferred stock financing?

Answer 1

Solution and Explanation:

Given data:

the market price of share = $80, the par value of share = $75, floatation cost = $3.5, corporate tax = 21 %

The Annual dividend = 75 multiply with 16 percent = $12

Hence, the cost of preferred stock = Annual dividend divide by (Current price-Flotation cost)

= 12 / (80-3.5)

after solving, we get, which is equal to

= 15.69% (Approx) (rounded off to 2 decimal places)

NOTE: The Tax rate would not affect the cost of preferred stock financing.