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9. Warephase Corporation has preferred stock outstanding. The stock has a 12% dividend rate. The stock’s...

9. Warephase Corporation has preferred stock outstanding. The stock has a 12% dividend rate. The stock’s market price is $80 per share, and its par value is $75. If new shares are issued, the firm will pay $2 per share in flotation costs. The corporate tax rate is 21%. What is the company’s cost of preferred stock financing?

a) 10% c) 9.12% e) 11.54%

b) 12.5% d) 9.74%

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Answer #1

Cost of Preferred Stock Financing

Annual Preferred Dividend

Annual Preferred Dividend = Par Value x Dividend Rate

= $75 x 12%

= $9.00 per share

Market Price per share = $80.00 per share

Flotation Cost per share = $2.00 per share

Cost of Preferred Stock Financing = [Annual Preferred Dividend / (Market Price per share – Flotation cost per share)] x 100

= [$9.00 / ($80.00 - $2.00)] x 100

= [$9.00 / $78.00] x 100

= 11.54%

“Therefore, the company’s cost of preferred stock financing would be (e). 11.54%”

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