Question

Travis Industries plans to issue perpetual preferred stock with an $11.00 dividend. The stock is currently selling for $108.00, but flotation costs will be 10% of the market price, so the net price will be $97.20 per share. What is the cost of the preferred stock, including flotation

Answer 1

The cost of the preferred stock, including flotation is 11.31%

Step-by-step explanation:

In order to calculate the cost of the preferred stock, including flotation we would have to use the following formula:

cost of the preferred stock= Annual Dividend

Price×(1-Flotation Cost)

cost of the preferred stock= $11

$108×(1-10%)

cost of the preferred stock= $11

$97.20

cost of the preferred stock=11.31%

The cost of the preferred stock, including flotation is 11.31%