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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?

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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

jeff jeffy answered 2 years ago
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