Chapter 10, Problem 14P

Fundamentals of Financial Manageme...

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

Chapter
Section

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, CostĀ ofĀ PreferredĀ 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). CostĀ ofĀ preferredĀ stock=$11\$103

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