Question

14. (Cost of Preferred Stock) Your firm is planning to issue preferred stock. The stock sells for Rs120; however, if new stock is issued, the company would receive only Rs95. The par value of the stock is Rs100 and the dividend rate is 12 percent. What is the cost of capital for the stock to your firm?

Answer 1

Preferred Stock sells = $120 per share

Preferred stock value (after new stock issued) = $95

Par value of the preferred stock = $100

Dividend rate = 12%

Preferred Dividend paid = ($100 * 12%)

Preferred Dividend paid = $12

Cost of Capital for the preferred stock = Preferred stock dividend / Net proceeds per preferred shares = $12 / $95 = 0.1263 or 12.63%