Question

A company has preferred stock that can be sold for $28 per share. The preferred stock pays an annual dividend of 5% based on a par value of $100. Flotation costs associated with the sale of preferred stock equal $1.50 per share. The company's marginal tax rate is 35%. Therefore, the cost of preferred stock is;

Answer 1

18.87%

Step-by-step explanation:

The computation of the cost of preferred stock is shown below:

As we know that

The cost of preferred stock = Preferred dividend ÷ (issue price per share - flotation costs per share)

where,

Preferred dividend is

= 100 × 5%

= $5

Issued price per share is $28

And, the flotation cost is $1.50

So, the cost of preferred stock is

= $5 ÷ ($28 - $1.50)

= 18.87%

We simply applied the above formula