A firm's preferred stock is selling at $83 and pays a 9.5% annual dividend on a $100 par value. What is the cost of preferred if flotation costs are 12%?

Question

Quizplus · Accepted Answer

The cost of preferred stock is calculated using the formula: Cost of Preferred Stock = Dividend / (Price - Flotation Costs). The dividend is 9.5% of $100, which is $9.50. The flotation cost is 12% of $83, which is $9.96. Therefore, the cost of preferred stock is $9.50 / ($83 - $9.96) = 13.01%.

A Firm's Preferred Stock Is Selling at $83 and Pays