With a market yield on preferred stock of 8% and a proposed annual dividend rate of 7.5% on a $100 par value, what is the component cost of capital for a new preferred stock issue if flotation costs of 16% are assumed?

Question

Quizplus · Accepted Answer

The component cost of preferred stock (r_ps) can be calculated using the formula r_ps = D / (P(1-F)), where D is the dividend, P is the par value, and F is the flotation cost as a decimal. Here, D = 7.5 (7.5% of $100), P = $100, and F = 0.16 (16%). Plugging these values in gives r_ps = 7.5 / (100 * (1 - 0.16)) = 7.5 / 84 = 0.0893 or 8.93%. The correct answer is A, not C, based on the calculation error in the initial response.

With a Market Yield on Preferred Stock of 8% and a Proposed