Melba's Toast has a preferred share issue outstanding with a current price of $19.50. The firm is expected to pay a dividend of $2.34 per share a year from today. What is the firm's
Cost of preferred equity?

Question

Quizplus · Accepted Answer

The cost of preferred equity can be calculated using the formula:
Cost of preferred equity = Dividend per share / Net proceeds per share

Net proceeds per share can be found by subtracting flotation costs from the current market price:
Net proceeds per share = Current market price - Flotation costs

Since no information is given about flotation costs, it is assumed to be zero. Thus, the net proceeds per share is equal to the current market price.

Plugging in the values, we get:

Cost of preferred equity = $2.34 / $19.50 = 0.12 = 12%

Therefore, the best choice is C.

Melba's Toast Has a Preferred Share Issue Outstanding with a Current