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;

Question

Laura Kelly

Business

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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Tomas Huber · Answer 1

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