General Bill's will issue preferred stock to finance a new artillery line.The firm's existing preferred stock pays a dividend of $4.00 per share and is selling for $40 per share.Investment bankers have advised General Bill that flotation costs on the new preferred issue would be 5% of the selling price.The General's marginal tax rate is 30%.What is the relevant cost of new preferred stock?
A) 7.00%
B) 7.37%
C) 10.00%
D) 10.53%
E) 15.00%

Question

Quizplus · Accepted Answer

The cost of new preferred stock is calculated as the dividend divided by the net proceeds per share (selling price minus flotation costs). The dividend is $4.00, and the net proceeds are $40 - (5% of $40) = $38. The cost is $4.00 / $38 = 10.53%. The tax rate does not affect preferred stock cost.

General Bill's Will Issue Preferred Stock to Finance a New