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17 May, 10:01

A company's perpetual preferred stock currently sells for $92.50 per share, and it pays an $8.00 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 5.00% of the issue price. What is the firm's cost of preferred stock?

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  1. 17 May, 10:25
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    Answer:$12.63

    Explanation:

    The preferred stock is a fund raising mechanism used by a firm to raise fund from the public. A preferred stock can have a fixed rate of dividend and can be cummulative. A preferred stock of such means the firm is oblige to pay the dividend and if it's unable to pay in a particular year then it will added to future years.

    The issued price of the stock is a loan to the firm and the cost are the dividend and issuing cost incurred by the firm, in the above scenario the cost of the stock is

    (5% of $92.50) + $8

    = $12.63
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