Hettenhouse Company's perpetual preferred stock sells for $102.50 per share,and it pays a $9.50 annual dividend.If the company were to sell a new preferred issue,it would incur a flotation cost of 4.00% of the price paid by investors.What is the company's cost of preferred stock for use in calculating the WACC?

Question

Quizplus · Accepted Answer

The cost of preferred stock is calculated as the annual dividend divided by the net proceeds after flotation costs.

Net proceeds after flotation costs = $102.50 - ($102.50 x 4%) = $98.40

Cost of preferred stock = $9.50 / $98.40 = 0.0965 or 9.65%

Hettenhouse Company's Perpetual Preferred Stock Sells for $102