A firm has issued preferred stock at its $125 per share par value. The stock will pay a $15 annual dividend. The cost of issuing and selling the stock was $4 per share. The cost of the preferred stock is ________. A. 12 percent B. 12.4 percent C. 7.2 percent D. 15 percent

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DeniceSandidge DeniceSandidge · Answer 1 · 2019-11-14T08:17:37+01:00

Answer:

Cost of preferred stock = 12%

correct option is A. 12 percent

Explanation:

given data

preferred stock = $125 per share

annual dividend = $15

cost of issuing and selling = $4 per share

to find out

cost of the preferred stock

solution

we know that Cost of preferred stock is express as

Cost of preferred stock = Annual dividend ÷ (Stock price-Flotation cost) ...........................1

and we know Flotation cost will be here = [tex]\frac{4}{125}[/tex] = 3.20 %

so

from equation 1 we get

Cost of preferred stock = Annual dividend ÷ (Stock price-Flotation cost)

Cost of preferred stock = $15 ÷ ($125 - 3.20 % )

Cost of preferred stock = 0.120030

Cost of preferred stock = 12%

correct option is A. 12 percent