Question

Bauer Company’s preferred stock is currently selling at $80 per share and pays an annual dividend of $8 per share. The company will incur 5% flotation cost if they issue new preferred stock. What is Bauer’s cost of preferred stock (with adjustment of flotation costs). (A) 11.05%(B) 10.23%(C) 10.53%(D) 11.81%(E) 10.74%

Answer 1

Answer:

(C) 10.53%

Explanation:

The flotation cost makes the cost of the preferred stock at more flotation because a portion of the proceeds from the share is taken away to pay up the flotation cost.

$r_p = \frac{D}{P(1-f)}$

$r_p = \frac{8}{80(1-0.05)}$

$r_p = \frac{8}{80(0.95)}$

$r_p = \frac{8}{76}$

$r_p = 0,105263$