A company's perpetual preferred stock currently sells for $105.00 per share,and it pays an $8.00 annual dividend.If the company were to sell a new preferred issue,it would incur a flotation cost of 5.00% of the issue price.What is the firm's cost of preferred stock?

Question

Quizplus · Accepted Answer

The firm's cost of preferred stock is the annual dividend divided by the net proceeds from the sale of the stock. The net proceeds are the issue price minus the flotation cost. In this case, the issue price is $105.00 and the flotation cost is 5.00%, or $5.25. Therefore, the net proceeds are $99.75. The annual dividend is $8.00. Therefore, the firm's cost of preferred stock is 8.02%.

A Company's Perpetual Preferred Stock Currently Sells for $105