Cost of preferred stock Kyle is raning funds for his company by selling prefered stock The preferred stock has a par value of $91 and a dividend rate of 9.4% The stock is selling for $74 55 in the market Kyle hees Wison Investment Bankers to sell the preferred stock Wilson charges a fee of 3% on the sale of preferred stock What is the cost of preferred stock for Kyle using the investment banker?
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
![**Educational Transcription: Cost of Preferred Stock Calculation**
**Scenario:**
Kyle is raising funds for his company by selling preferred stock. Here are the specifics of the transaction:
- **Par Value:** $91
- **Dividend Rate:** 9.4%
- **Market Selling Price:** $74.55
- **Fee Charged by Wilson Investment Bankers:** 3% on the sale of preferred stock
**Question:**
What is the cost of preferred stock for Kyle using the investment banker?
**Instruction:**
Calculate and round the result to two decimal places.
**Explanation:**
To calculate the cost of the preferred stock for Kyle, including the fee charged by the investment banker, follow these steps:
1. **Determine the Dividend Payment:**
- Dividend Payment = Par Value * Dividend Rate
- Dividend Payment = $91 * 0.094 = $8.554
2. **Calculate the Fee Charged:**
- Fee Charged = Market Selling Price * Fee Rate
- Fee Charged = $74.55 * 0.03 = $2.2365
3. **Adjust the Market Selling Price by Adding the Fee to the Selling Price:**
- Adjusted Market Selling Price = Market Selling Price + Fee Charged
- Adjusted Market Selling Price = $74.55 + $2.2365 = $76.7865
4. **Determine the Cost of Preferred Stock:**
- Cost of Preferred Stock = Dividend Payment / Adjusted Market Selling Price
- Cost of Preferred Stock = $8.554 / $76.7865 ≈ 0.1114 or 11.14%
Hence, the cost of preferred stock for Kyle using the investment banker is approximately **11.14%**.
**Graph/Diagram Explanation:**
There are no graphs or diagrams present in this image.
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This calculation helps in understanding the overall cost efficiency of issuing preferred stock while considering administrative fees and the expected returns on investments for shareholders.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F136a9916-8a5d-490b-a1c4-57e644d5608a%2Ffc893103-283f-4ab3-b6a0-6310408c368d%2F5s5stj_processed.jpeg&w=3840&q=75)
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