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18 July, 05:44

Bosio Inc. s perpetual preferred stock sells for $97.50 per share, and it pays an $8.50 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What is the companys cost of preferred stock for use in calculating the WACC?

a. 8.72%

b. 9.08%

c. 9.44%

d. 9.82%

e. 10.22%

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  1. 18 July, 05:56
    0
    b. 9.08%

    Explanation:

    Cost of preferred stock is the required rate of return by investors for providing capital to a company.

    Formula for cost of preferred stock = Dividend / Price * (1-Flotation cost)

    Dividend = $8.50

    Price = $97.50

    Flotation cost = 4% or 0.04 as a decimal

    Next, plug in the numbers to the formula;

    Cost of preferred stock = 8.50 / [97.50 (1-0.04) ]

    = 8.50 / 93.6

    = 0.0908 or 9.08% as a percentage
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