Question

1. Mr. White's company wants to issue new preferred stock. The preferred dividend is $3.21 per share and the stock can be sold for $31. If the flotation costs are $3, what is the company's cost of preferred stock, Kp? A) Less than 6%the time it takes to receive cash flows sufficient to cover your initial investment B) Between 6.00 and 10.00% C) Between 10.01% and 13% D) Greater than 13%

Answer 1

Calculation of cost of preferred stock:

Cost of preferred stock= Preferred dividend/(stock price-flotation cost)

Cost of preferred stock= 3.21/(31-3)= 0.1146

Cost of preferred stock= 11.46%

So correct answer is C) Between 10.01% and 13%