A company's perpetual preferred stock currently sells for $58.75 per share,

A company's perpetual preferred stock currently sells for $58.75 per share, and it pays a $3.00 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 2.50% of the issue price. What is the firm's cost of preferred stock?

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Expert Solution

Here,

Current Selling Price of Preferred Stock = $58.75

Annual Dividend = $3

Floatation Costs = 2.50%

Using the Formula of Cost of Preferred Stock

Cost of Preferred Stock = $3/$57.28125

Cost of Preferred Stock = 0.0523731587561 or 5.24%

The firm's Cost of Preferred Stock is 5.24%.

Junaid answered 1 year ago

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