Mid-States Utility Company just issued a $3.20 cumulative preferred stock at a price to the public of $30 a share. The flotation costs were $1.50 a share, and the issue will be retired in 20 years at its $30 par value. What is the cost of this preferred issue?

Question

Quizplus · Accepted Answer

The cost of the preferred issue is the annual dividend divided by the net proceeds from the sale of the stock. The annual dividend is $3.20 per share, and the net proceeds from the sale of the stock are $30 - $1.50 = $28.50 per share. Therefore, the cost of the preferred issue is $3.20 / $28.50 = 11.23%, or approximately 11.3%.

Mid-States Utility Company Just Issued a $3