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14 January, 02:29

A company has preferred stock that can be sold for $28 per share. The preferred stock pays an annual dividend of 5% based on a par value of $100. Flotation costs associated with the sale of preferred stock equal $1.50 per share. The company's marginal tax rate is 35%. Therefore, the cost of preferred stock is;

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  1. 14 January, 02:36
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    18.87%

    Explanation:

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

    As we know that

    The cost of preferred stock = Preferred dividend : (issue price per share - flotation costs per share)

    where,

    Preferred dividend is

    = 100 * 5%

    = $5

    Issued price per share is $28

    And, the flotation cost is $1.50

    So, the cost of preferred stock is

    = $5 : ($28 - $1.50)

    = 18.87%

    We simply applied the above formula
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