Question

Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotation cost of 2 percent of the face value would be required in addition to the discount of $40. Preferred Stock: The firm can issue preferred stock at $75 per share par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is $3 per share. Common Stock: A firm's common stock is currently selling for $18 per share. The dividend expected to be paid at the end of the coming year is $1.74. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was $1.50. It is expected that to sell, a new common stock issue must be underpriced $1 per share in flotation costs. Additionally, the firm's marginal tax rate is 40 percent. The firm's cost of preferred stock is

Answer 1

Answer:

13.89%

Explanation:

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

As we know that

Cost of Preferred Stock = Annual Dividend ÷ (Current Market Price - Flotation Cost)

= $10 ÷ ($75 - $3)

= $10 ÷ $72

= 13.89%

We simply applied the above formula so that the cost of preferred stock could come i.e by considering the annual dividend, current market price and the flotation cost