Warephase Corporation has preferred stock outstanding. The stock has a 16% dividend rate. The stockâs market price is $80 per share, and its par value is $75. If new shares are issued, the firm will pay $3.50 per share in flotation costs. The corporate tax rate is 21%. What is the companyâs cost of preferred stock financing?

The cost of the company's preferred stock financing is 15.7%

Explanation:

In this question, we are asked to calculate a company's cost of preferred stock financing.

Firstly, we calculate the annual dividend of the company.

Mathematically, that is equal to dividend rate * par value

From the question, dividend rate is 16% while par value is $75

Thus, Annual dividend is 16/100 * 75 = $12

To get the cost of preferred stock, we employ a mathematical approach.

Mathematically, cost of preferred stock = Annual dividend / (current price - floatation cost)

From the question, current price is $80 while the floatation cost is $3.5 per share.

Cost of preferred stock = 12 / (80-3.5)

= 12/76.5 = 0.157

This is same as 15.7%

The company cost of preferred stock financing is 15.7%

Explanation:

From the example given, in solving for the company's cost of preferred stock financing. Let recall the following,

The first step is to calculate the annual dividend of the company

Dividend rate x par value

Ware phase Corporation has a dividend rate of 16% stock

Stock market price is = $80

The dividend rate is 16% while par value is $75

The Annual dividend is 16/100 x 75 = $12

The next step is using a mathematical approach.

The cost of preferred stock = Annual dividend / (current price - flotation cost)

From the example, the current price is $80 while the flotation cost is $3.5 per share.

Therefore,

The Cost of preferred stock = 12 / (80-3.5)

Which is = 12/76.5 = 0.157 or 15.7%