Nico Trading Corporation is considering issuing preferred stock. The preferred stock would have a par value of $75 and a preferred dividend of 7.5 percent of par. In order to issue the stock, Nico trading would have to pay flotation costs of 6 percent of par value. Given this information, Nico Trading's cost of preferred stock would be 7.98 percent.

Question

Quizplus · Accepted Answer

The cost of preferred stock is calculated by dividing the preferred dividend by the net proceeds per share (par value minus flotation costs). The dividend is $5.625 (7.5% of $75), and the net proceeds are $70.50 ($75 - 6% of $75). The cost is $5.625 / $70.50 = 7.98%.

Nico Trading Corporation Is Considering Issuing Preferred Stock