A firm has determined it can issue preferred stock at $115 per share par value. The stock will pay a $12 annual dividend. The cost of issuing and selling the stock is $3 per share. The cost of the preferred stock is ________.
A) 6.4 percent.
B) 10.4 percent.
C) 10.7 percent.
D) 12 percent.

Question

Quizplus · Accepted Answer

The cost of preferred stock can be calculated using the formula:

Cost of Preferred Stock = Annual Dividend / Net Proceeds

Net Proceeds = Par Value - Cost of Issuing and Selling
Net Proceeds = $115 - $3
Net Proceeds = $112

Now, plug in the values:

Cost of Preferred Stock = $12 / $112
Cost of Preferred Stock = 0.107, or 10.7%

Therefore, the cost of the preferred stock is 10.7%, which is option C.

A Firm Has Determined It Can Issue Preferred Stock at $115