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30 April, 00:24

Travis Industries plans to issue perpetual preferred stock with an $11.00 dividend. The stock is currently selling for $100.00; but flotation costs will be 5% of the market price, so the net price will be $95.00 per share. What is the cost of the preferred stock, including flotation? Round your answer to two decimal places.

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  1. 30 April, 00:47
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    11.58%

    Explanation:

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

    Cost of preferred stock = (Annual dividend) : {Price of preferred stock per share * (1 - flotation cost) }

    = ($11) : { ($100 * (1 - 0.05) }

    = $11 : $95

    = 11.58%

    Simply we divide the annual dividend by the price of preferred stock per share after considering the flotation cost so that the correct cost of preferred stock can be computed
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