Question

Burnwood Tech plans to issue some $50 par preferred stock with a 8% dividend. A similar stock is selling on the market for $65. Burnwood must pay flotation costs of 6% of the issue price. What is the cost of the preferred stock? Round your answer to two decimal places.

Answer 1

6.5%

Explanation:

The formular used to calculate the cost of preferred stock is:

= Fixed dividend/Net proceeds

Fixed dividend= $50 × 8/100

= $50×0.08

=$4

Net proceeds= Market price-Flotation costs

= $65-(6/100×$65)

= $65-(0.06×$65)

= $65-3.9

= $61.1

Therefore cost of preferred stock is

= 4/61.1 ×100

= 0.065×100

= 6.5%

Hence the cost of preferred stock is 6.5%