Burnwood Tech plans to issue some $50 par preferred stock with a 8% dividend. A similar stock is selling on the market for $65. Burnwood must pay flotation costs of 6% of the issue price. What is the cost of the preferred stock? Round your answer to two decimal places.

6.5%

Step-by-step explanation:

The formular used to calculate the cost of preferred stock is:

= Fixed dividend/Net proceeds

Fixed dividend = $50 * 8/100

= $50*0.08

=$4

Net proceeds = Market price-Flotation costs

= $65 - (6/100*$65)

= $65 - (0.06*$65)

= $65-3.9

= $61.1

Therefore cost of preferred stock is

= 4/61.1 * 100

= 0.065*100

= 6.5%

Hence the cost of preferred stock is 6.5%