Question

Travis Industries plans to issue perpetual preferred stock with an $11.00 dividend. The stock is currently selling for $100.00; but flotation costs will be 5% of the market price, so the net price will be $95.00 per share. What is the cost of the preferred stock, including flotation? Round your answer to two decimal places.

Answer 1

11.58%

Step-by-step explanation:

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

Cost of preferred stock = (Annual dividend) ÷ {Price of preferred stock per share × (1 - flotation cost)}

= ($11) ÷ {($100 × (1 - 0.05)}

= $11 ÷ $95

= 11.58%

Simply we divide the annual dividend by the price of preferred stock per share after considering the flotation cost so that the correct cost of preferred stock can be computed