Question

Travis Industries plans to issue perpetual preferred stock with an $11.00 dividend. The stock is currently selling for $87.50, but flotation costs will be 6% of the market price, so the net price will be $82.25 per share. What is the cost of the preferred stock, including flotation?

Answer 1

the cost of the preferred stock is 13.37%

Step-by-step explanation:

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

= Annual dividend ÷ Price × (1 - flotation cost)

= $11 ÷ 87.50 × (1 - 0.06)

= $11 ÷ $82.25

= 13.37%

Hence, the cost of the preferred stock is 13.37%

We simply applied the above formula so that the correct value could come

And, the same is to be considered