Bosio Inc.'s perpetual preferred stock sells for $102.50 per share,and it pays an $8.50 annual dividend.If the company were to sell a new preferred issue,it would incur a flotation cost of 4.00% of the price paid by investors.What is the company's cost of preferred stock for use in calculating the WACC?

Question

Quizplus · Accepted Answer

The cost of preferred stock is calculated as the dividend divided by the net price (price after flotation costs). The net price is $102.50 * (1 - 0.04) = $98.40. The cost is $8.50 / $98.40 = 8.64%.

Bosio Inc'S Perpetual Preferred Stock Sells for $102