Question
In: Finance
A company is planning to issue $25 face value preferred stock to raise capital. The stock...
A company is planning to issue $25 face value preferred stock to raise capital. The stock is expected to sell at 97.5% of its face value. The annual dividend is $2.25. If the flotation cost is 7%, what is the cost of preferred stock?
Solutions
Expert Solution
| Cost of preferred stock | = | Annual dividend | / | Current net proceeds from the issuance of preferred stock | |||||||||
| = | $ 2.25 | / | $ 22.67 | ||||||||||
| = | 9.93% | ||||||||||||
| Working: | |||||||||||||
| Selling price of stock | = | $ 25.00 | * | 97.5% | = | $ 24.38 | |||||||
| Current net proceeds from the issuance of preferred stock | |||||||||||||
| = | Selling price of stock * (1- flotation cost) | ||||||||||||
| = | $ 24.38 | * | (1-0.07) | ||||||||||
| = | $ 22.67 | ||||||||||||
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