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23 April, 01:58

Costly Corporation is considering a new preferred stock issue. The preferred would have a par value of $1000 with an annual dividend equal to 15.0% of par. The company believes that the market value of the stock would be $576.00 per share with flotation costs of $52.00 per share. The firm's marginal tax rate is 40%. What is the firm's cost of preferred stock?

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  1. 23 April, 02:15
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    28.63%

    Explanation:

    The computation of the cost of preferred stock is shown below:

    Cost of the preferred stock = Dividend : Price of the stock

    where,

    Dividend is

    = $1,000 * $15%

    = $150

    And, the price of the stock is

    = Market value of the stock - flotation cost

    = $576 - $52

    = $524

    So, the cost of preferred stock is

    = $150 : $524

    = 28.63%

    We ignored the marginal tax rate i. e 40%
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