Question

Bosio Inc.'s perpetual preferred stock sells for $102.50 per share, and it pays an $8.50 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What is the company's cost of preferred stock for use in calculating the WACC?

Answer 1

Answer:

8.38%

Explanation:

Data provided

Annual dividend = $8.5

Perpetual preferred stock = $102.50

Flotation cost = 4.00%

The computation of cost of preferred stock is shown below:-

Cost of preferred stock = Annual dividend - (Perpetual preferred stock - (Perpetual preferred stock × Flotation cost percentage))

= $8.5 ÷ ($102.50 - ($102.50 × 0.04))

= $8.5 ÷ ($102.50 - $4.1)

= $8.5 ÷ $101.4

= 8.38%