Mid-States Utility Company just issued at $3.20 cumulative preferred stock at a price to the public of $30 a share.The flotation costs were $1.50 a share and the issue will be retired in 20 years at its $30 par value.What is the cost of this preferred issue?

Question

Quizplus · Accepted Answer

$28.50 = $3.20(PVIFAkp,₂₀) + $30(PV1Fkp,₂₀)
Try 11%: $3.20(7.963) + $30(0.124) = $29.20
Try 12%: $3.20(7.469) + $30(0.104) = $27.02
kp = 11% + $\frac { \$ 0.70 } { \$ 0.70 + \$ 1.48 }$ (12% - 11%) = 11.3%

Mid-States Utility Company Just Issued at $3