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The preferred stock of the company sells for $35 and pays $3 in dividends. Flotation costs...

The preferred stock of the company sells for $35 and pays $3 in dividends. Flotation costs will be 5% of market price. Calculate the cost of preferred stock.
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Answer #1

Annual Dividend = $3.00
Current Price = $35.00
Flotation Cost = 5%

Net Issue Price = Current Price * (1 - Flotation Cost)
Net Issue Price = $35.00 * (1 - 0.05)
Net Issue Price = $33.25

Cost of Preferred Stock = Annual Dividend / Net Issue Price
Cost of Preferred Stock = $3.00 / $33.25
Cost of Preferred Stock = 0.0902 or 9.02%

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