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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

COST OF PREFERRED STOCK INCLUDING FLOTATION Travis Industries plans to issue perpetual preferred stock with an $11.00 dividend. The stock is currently selling for $108.50, but flotation costs will be 5% of the market price, so the net price will be $103.08 per share. What is the cost of the preferred stock, including flotation?

Summary Introduction

To determine: The cost of preferred stock including flotation.

Introduction:

Cost of Preferred Stock:

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

Explanation

Given information:

Dividend per share is $11 per share.

Current price of stock is $108.50.

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.

Substitute $11 for DP and $103.08 for PP (Working note).

Cost of preferred stock=$11$103

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