mary has outstanding preferred stock That pays a dividend of $4 per share and sells for $82 per share, with a floatation cost of $6 per share. What is the component cost for Coogly's preferred stock? What are the advantages and disadvantages of using preferred stock in the capital structure

To find the component cost for Coogly's preferred stock, you need to calculate the cost of issuing the preferred stock, which includes the dividend payment and the floatation cost.

1. Dividend Payment:
The dividend payment per share is $4.

2. Floatation Cost:
The floatation cost per share is $6.

To calculate the component cost, you can use the following formula:

Component Cost = Dividend Payment / Stock Price - Floatation Cost

Component Cost = $4 / $82 - $6

Simplifying the expression:

Component Cost = $0.0488 - $6

Component Cost ≈ -$5.9512

Notice that the result is negative. This indicates an error in computation, most likely due to the dividend not being sufficient to cover the floatation cost and provide a positive return.

Advantages of using preferred stock in the capital structure:

1. Preference in Dividends: Preferred stockholders have a higher claim on company profits and receive dividends before common stockholders.
2. Stability: Preferred stock generally provides a fixed dividend, which can be attractive to investors seeking a steady income.
3. No Voting Rights: Preferred stockholders usually do not have voting rights, which allows company management to maintain control.
4. Seniority in Liquidation: In the event of liquidation, preferred stockholders have a higher priority in receiving their investment back compared to common stockholders.

Disadvantages of using preferred stock in the capital structure:

1. Cost: Preferred stock dividends are typically higher than bond interest rates, making it more expensive for the company to raise capital.
2. Non-Participation: Preferred stockholders do not participate in the company's growth through increased stock value as common stockholders do.
3. Lack of Voting Rights: Not having voting rights means preferred stockholders have limited influence over company decisions.
4. Call Option Risk: The company may have the right to redeem the preferred shares at a predetermined price, which exposes investors to the risk of losing their investment prematurely.

It's important to note that the component cost calculation provided earlier resulted in a negative value, suggesting an error. This indicates that the preferred stock considered does not provide a positive return after accounting for the dividend payment and floatation cost.