Question

Torch Industries can issue perpetual preferred stock at a price of $54.00 a share. The stock would pay a constant annual dividend of $4.50 a share. What is the company's cost of preferred stock, rp? Round your answer to two decimal places

Answer 1

1.Information provided:

Preference shares dividend= $4.50

Share price= $54

The cost of preferred stock is calculated using the below formula:

Kps=Dps/P

where:

Kps= Cost of preferred stock

Dps=preferred dividend

P= Market price of preferred stock

Kps= $4.50/ $54

       = 0.0833*100

       = 8.33%.

2. Information provided:

Preference shares dividend= $11

Share price= $95.50

Flotation costs= 7%

The cost of preferred stock= $11/$95.50*(1-0.07)

                                                    = $11/ $88.82

                                                    = 0.1238*100

                                                    = 12.3846% $\rightarrow$      12.38%.

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