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Duggins Veterinary Supplies can issue perpetual preferred stock at a price of $50 a share with...

Duggins Veterinary Supplies can issue perpetual preferred stock at a price of $50 a share with an annual dividend of $4.50 per share. Duggins must pay flotation costs of 5% of the issue price. What is the Duggin’s cost of preferred stock?

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Expert Solution

Preferred Stock

Preferred stock can be defined as a stock which entitles priority in relation to amount of dividend over dividend paid to common stock. Also, they have preference over allocation of assets of the company in a situation of insolvency of the company.

The formula for calculating cost of preferred stock is given in the equation below:

Where, D refers to Annual Dividend of Preferred Stock;

P0 refers to Price of Stock, and

k refers to Floatation Cost of Preferred Stock.

Compute cost of preferred stock by using the equation given below:

Hence, the cost of preferred stock comes out to be 9.47%.

jeff jeffy answered 2 years ago
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