Question

Travis Industries plans to issue perpetual preferred stock with an $11.00 dividend. The stock is currently selling for $108.00, but flotation costs will be 10% of the market price, so the net price will be $97.20 per share. What is the cost of the preferred stock, including flotation

Answer 1

Answer:

The cost of the preferred stock, including flotation is 11.31%

Explanation:

In order to calculate the cost of the preferred stock, including flotation we would have to use the following formula:

cost of the preferred stock= Annual Dividend

                                                Price×(1-Flotation Cost)

cost of the preferred stock=     $11        

                                              $108×(1-10%)

cost of the preferred stock=    $11        

                                               $97.20

cost of the preferred stock=11.31%

The cost of the preferred stock, including flotation is 11.31%