A firm has $2 million market value and it sells preferred stock with a par value of $100.If the coupon rate on the preferred stock is 8% and the preferred stock trades at $90,what is the cost of preferred stock financing?
A)8.75%
B)8.89%
C)9.21%
D)9.35%
E)10.16%

Question

Quizplus · Accepted Answer

The cost of preferred stock financing is calculated as the dividend payment divided by the net proceeds from issuing the preferred stock.

First, we need to calculate the dividend payment per share of preferred stock:

Dividend payment = Coupon rate x Par value = 8% x $100 = $8

Next, we need to calculate the net proceeds from issuing the preferred stock:

Net proceeds = Market value per share - Issue cost per share = $90 - $0 = $90

Finally, we can calculate the cost of preferred stock financing:

Cost of preferred stock financing = Dividend payment / Net proceeds = $8 / $90 = 0.0889 or 8.89%

Therefore, the best choice is B.

A Firm Has $2 Million Market Value and It Sells