Ningbo Shipping has issued preferred stock at its $125 per share par value. The stock will pay a $15 annual dividend. The cost of issuing and selling the stock was $4 per share. The cost of Ningbo Shipping preferred stock is:

Question

Quizplus · Accepted Answer

The cost of Ningbo Shipping preferred stock can be calculated using the following formula:

Cost of preferred stock = (annual dividend / net proceeds from sale of preferred stock) + flotation costs

Annual dividend = $15
Net proceeds from sale of preferred stock = $125 - $4 = $121
Flotation costs = $4

Cost of preferred stock = ($15 / $121) + $4 = 0.1231 or 12.31%

Therefore, the cost of Ningbo Shipping preferred stock is 12.4%, which is closest to option C.

Ningbo Shipping Has Issued Preferred Stock at Its $125 Per