Preferred stock is paying an annual dividend of $9.50 and is currently trading at $79.16. Assume floatation costs of 12%. What is the cost of preferred stock?

Question

Quizplus · Accepted Answer

The cost of preferred stock can be calculated using the formula: Cost of Preferred Stock = Dividend / (Price - Flotation Costs). Here, the flotation costs are 12% of the price, so the net proceeds from the issue are $79.16 * (1 - 0.12) = $69.66. Therefore, the cost of preferred stock = $9.50 / $69.66 = 0.1364 or 13.64%.

Preferred Stock Is Paying an Annual Dividend of $9