A firm has determined it can issue preferred stock at $115 per share par value. The stock will pay a$12 annual dividend. The cost of issuing and selling the stock is $3 per share. The cost of thepreferred stock is
A) 10.4 percent.
B) 10.7 percent.
C) 12 percent.
D) 6.4 percent.

Question

Quizplus · Accepted Answer

The cost of preferred stock is the dividend divided by the net proceeds per share. The net proceeds per share is equal to the issue price per share minus the flotation cost per share.

Net proceeds per share = $115 - $3 = $112

Cost of preferred stock = $12 / $112 = 0.107 or 10.7%

A Firm Has Determined It Can Issue Preferred Stock at $115