Question

Events Map Apply SearchiA-Z 1 Sites 10.0 Points Question 4 of 10 CDE Inc.'s current (and optimal) capital structure is 40 % debt, 10 % preferred stock, and 50 % common equity. CDE is in the 40%% tax bracket. The company can issue up to $20,000,000 in new bonds at par with a 7 % coupon rate; any subsequent amount must carry a 2% premium to compensate investors for added risk. A new issue of preferred stock would pay an annual dividend of $4.00 and be priced to net the company $50.00 per share after the $3.00 per share floatation cost. The firm has $21,000,000 in change in retained earnings for the current period. CDE's common stock trades at $40.00 per share and the expected dividend on the common stock at t1 is 2.00. Floatation costs on a new common stock issue is $5.00 per share. The company is growing at 7 % per year. What is the cost of preferred stock? A 8.00% x B.8.50% Oc.12.50% D. 20.00%

Answer 1

Cost of preferred stock can be computed with following formula:

$k_p = \frac{\textup{Preferred Dividend}}{\textup{Net proceeds from Issue of preferred stock}}$

putting the values:

$k_p = \frac{4}{50}$

$k_p = 0.08$

$\bg_green \large k_p = 8.00\%$

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.