A company’s perpetual preferred stock currently trades at $80 per share and pays a $6.00 annual dividend per share. If the company were to sell a new preferred issue, it would incur a flotation cost of 4%. What would the cost of that capital be?
1. Type a specific question about your assignment and then let us know what you have already done or what you already know about the assignment.
2. Remember that we do not do your work for you, but we are happy to look it over and make corrections or give suggestions.
To calculate the cost of capital for the company's perpetual preferred stock, we need to consider both the dividend payment and the flotation cost. The cost of capital is the return the company expects to pay to its investors.
First, let's calculate the dividend yield. The dividend yield is the annual dividend payment divided by the market price per share.
Dividend Yield = Dividend per share / Market price per share
Dividend Yield = $6.00 / $80 = 0.075 = 7.5%
Next, we need to consider the flotation cost. The flotation cost is the percentage of the total funds raised that the company incurs as a cost. In this case, the flotation cost is 4%.
To determine the cost of capital, we need to adjust the dividend yield by considering the flotation cost. We can use the following formula:
Cost of Capital = Dividend Yield / (1 - Flotation Cost)
Cost of Capital = 7.5% / (1 - 0.04) = 7.5% / 0.96 = 7.8125% (approximately)
Therefore, the cost of capital for the company's perpetual preferred stock would be approximately 7.8125%.