Rock Construction has preferred stock outstanding that sells for $98.50. If the firm were to issue new preferred stock, it would incur a 2 percent flotation cost. If the preferred stock pays a $7 annual dividend, what is the firm's cost of preferred stock?
A) 6.75%
B) 7.00%
C) 7.25%
D) 7.50%
E) 7.75%

Question

Quizplus · Accepted Answer

The cost of preferred stock is calculated as the dividend divided by the net proceeds from the sale of the stock. The net proceeds are the selling price minus flotation costs. Here, the dividend is $7, the selling price is $98.50, and the flotation cost is 2% of $98.50, which is $1.97. Therefore, the net proceeds are $98.50 - $1.97 = $96.53. The cost of preferred stock is $7 / $96.53 = 7.25%.

Rock Construction Has Preferred Stock Outstanding That Sells for $98