Question

A company’s perpetual preferred stock pays an annual dividend of $2.10 per share. The preferred stock’s market value is $36.04 per share and the company’s tax rate is 30%. If the flotation costs for preferred stock are 6%, what is the company’s annual cost of new preferred stock financing? Question 4 options: 1) 5.87% 2) 7.25% 3) 6.54% 4) 6.20% 5) 5.41%

Answer 1

6.20%

Step-by-step explanation:

The company’s annual cost of new preferred stock financing is the annual dividend payable on the preferred stock divided by the net price of the stock

annual dividend is $2.10

net price=market price*(1-flotation cost %)

net price=$36.04 *(1-6%)

net price=$ 33.88

company’s annual cost of new preferred stock financing=$2.10/$33.88

company’s annual cost of new preferred stock financing==6.20%