Bosio Inc.'s perpetual preferred stock sells for $97.50 per share,and it pays an $8.50 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 follows:
Cost of preferred stock = Dividend/Net proceeds
Net proceeds = (Market price - Flotation cost per share)
Net proceeds = ($97.50 - 4%*$97.50) = $93.60 per share
Cost of preferred stock = $8.50/$93.60 = 0.0908 or 9.08% (rounded to two decimal places)

Bosio Inc'S Perpetual Preferred Stock Sells for $97