Question

Burnwood Tech plans to issue some $60 par preferred stock with a 6% dividend. A similar stock is selling on the market for $70. Burn wood must pay flotation costs of5% of the issue price. What is the cost of the prferred stock?

Answer 1

Par Value of Preferred Stock = $60
Dividend percentage = 6%
Market Value of the stock = $70
Flotation costs = 5% of the issue price
Cost of Preferred Stock =?


Annual Dividend Payment on Preferred Stock = [6% * $60]
Annual Dividend Payment on Preferred Stock = $3.60

Cost of Preferred Stock = [Preferred Stock dividend / Market Price of
Preferred Stock]
[OR]

Cost of Preferred Stock = [Preferred Stock dividend / Market Price of
Preferred Stock (1-Flotation cost)]

Cost of Preferred Stock = [($60 * 6%) / $70 (1-0.05)]
Cost of Preferred Stock = [$3.60 / $70 (0.95)]
Cost of Preferred Stock = [$3.60 / $66.50]
Cost of Preferred Stock = 0.054135

Cost of Preferred Stock = 5.41%