Question

RetRyder Hand Trucks has a preferred share issue outstanding that pays a dividend of $1.30 per year. The current cost of preferred equity for RetRyder is 7.40 percent. If RetRyder issues additional preferred shares that pay exactly the same dividend and the investment banker retains 8.60 percent of the sale price, what is the cost of the new preferred shares for RetRyder?

What is the current price of preferred shares?

Answer 1

Current price of preferred shares = P(ps)

= D/K(ps)

= $1.3 / 0.074

= 17.567568

= $17.56

Cost of preferred equity = Kps

= D / P(ps)*(1-f)

= $1.3 / $17.56(1 - 0.086)

= $1.3 / $16.04984

= 0.080998

= 8.09%