A firm issued $15 million in preferred stock at a price of $3.25 per share. The preferred shares carry a 13% dividend, or $0.43 annually. After paying fees and costs, the firm realizes $2.89 per share issued. What is the cost of capital for this issuance of preferred stock?

Question

Business

Buckley

16 March, 20:01

A firm issued $15 million in preferred stock at a price of $3.25 per share. The preferred shares carry a 13% dividend, or $0.43 annually. After paying fees and costs, the firm realizes $2.89 per share issued. What is the cost of capital for this issuance of preferred stock?

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Answers (1)

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Archie · Answer 1

14.8%

Explanation:

Cost of capital for preferred stock can be calculated by a simple formula

Formula: Cost of preferred capital = dividend / (Current price - floatation cost)

As you can see in the question data current price - floatation cost and dividend is already given as $2.89 and $0.43 respectively. We just need to put values in formula.

Cost of preferred capital = $0.43/$2.89 x 100

Cost of preferred capital = 14.8%