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Burnwood Tech plans to issue some $60 par preferred stock with a 6% dividend Answer

Burnwood Tech plans to issue some $60 par preferred stock with a 6% dividend. A similar stock is selling on the market for $70. Burnwood must pay flotation costs of 5% of the issue price. What is the cost of the preferred stock?

 

Ans:

Cost of the preferred stock = D1 / P0(1-F)

Cost of the preferred stock = 3.6 /70(1- 0.05) = 0.0541 = 5.41 %

Cost of the preferred stock = 5.41%

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