Ask Question
21 April, 16:48

Hettenhouse Company's perpetual preferred stock sells for $102.50 per share, and it pays a $9.50 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What is the company's cost of preferred stock for use in calculating the WACC?

+3
Answers (1)
  1. 21 April, 20:02
    0
    The company's cost of preferred stock for use in calculating the WACC is 9.65%

    Explanation:

    For computing the cost of preferred stock, the following formula should be used which is shown below

    = Annual dividend based on preferred stock : (Price per share * Flotation cost)

    where,

    Flotation cost = 1 - rate

    = 1 - 4% = 0.96

    = $9.50 : ($102.50 * 0.96)

    = $9.50 : $98.4

    = 9.65%

    The flotation cost should be deducted because it is a one time expense. Thus, it would be minus from price per share.

    Hence, the company's cost of preferred stock for use in calculating the WACC is 9.65%
Know the Answer?
Not Sure About the Answer?
Get an answer to your question ✅ “Hettenhouse Company's perpetual preferred stock sells for $102.50 per share, and it pays a $9.50 annual dividend. If the company were to ...” in 📙 Business if there is no answer or all answers are wrong, use a search bar and try to find the answer among similar questions.
Search for Other Answers