Cost of Preferred Stock with Flotation Costs Burnwood Tech plans to issue some $60 par preferred...

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Cost of Preferred Stock with Flotation Costs Burnwood Tech plans to issue some $60 par preferred...

Cost of Preferred Stock with Flotation Costs

Burnwood Tech plans to issue some $60 par preferred stock with a 6% dividend. A similar stock is selling on the market for $61. Burnwood must pay flotation costs of 5% of the issue price. What is the cost of the preferred stock? Round your answer to two decimal places.

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Answer 1

Answer #1

Solution :

Fixed dividend = 60 × 6% = $ 3.6

Net proceeds = market price - flotation cost = 61 - (5% of 61) = $57.95

Cost of preferred stock = fixed dividend / net proceeds = 3.6/57.95= $6.21%

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Answer 2

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