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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

COST OF PREFERRED STOCK INCLUDING FLOTATION Trivoli Industries plans to issue perpetual preferred stock with an $11.00 dividend. The stock is currently selling for $97 00; but flotation costs will be 5% of the market price, so the net price will be $92 15 per share. What is the cost of the preferred stock, including flotation?

Summary Introduction

To determine: The cost of preferred stock including flotation.

Cost of Preferred Stock:

The return earned by of firm’s preferred stock holders from the investment in preferred stock is a cost of preferred stock. It is computed by dividing dividend received on preferred stock by the current price of the preferred stock.

Explanation

Given,

Dividend per share is $11 per share.

Current price of stock is $92.15 (net of flotation cost).

The formula to calculate the cost of preferred stock is,

Cost of Preferred Stock=DPPP

Where,

  • DP is the preferred dividend.
  • PP is the current price of preferred stock

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