Solar Utility is a rapidly expanding supplier of energy in the southwestern US. The firm has 5,000,000 shares of common stock outstanding on which it recently paid a $2 dividend. The common stock is currently priced at $30 per share. The firm wishes to maintain a payout ratio of 50%. The current earnings per share of $4 are expected to increase at an annual rate of 6% for the foreseeable future. The firm also has two long-term bond issues outstanding. An issue of 100 million bearing a 12% interest rate has been outstanding for two years and the bonds are selling at face (par) value. A prior bond issue of 60 million will mature in the forthcoming period and must be refunded with a new issue of bonds. The new 10 year bonds will have a coupon rate of 10% and are expected to sell for $900. Solar utilizes preferred stock as a financing source, and has 300,000 shares of $100 par value preferred shares outstanding. The firm pays an annual dividend of $6 on the preferred stock, which is currently selling at $75. The firm expects to continue to provide capital financing in the following proportions in the future: long-term debt, 40%; preferred stock, 10%; common stock, 20%; and retained earnings, 30%. The issue cost of common stock is 8% and preferred stock is 4% of the amount issued, and the firm is in a 34% tax bracket. Calculate the cost of preferred stock.
Solar Utility is a rapidly expanding supplier of energy in the southwestern US. The firm has 5,000,000 shares of common stock outstanding on which it recently paid a $2 dividend. The common stock is currently priced at $30 per share. The firm wishes to maintain a payout ratio of 50%. The current earnings per share of $4 are expected to increase at an annual rate of 6% for the foreseeable future. The firm also has two long-term bond issues outstanding. An issue of 100 million bearing a 12% interest rate has been outstanding for two years and the bonds are selling at face (par) value. A prior bond issue of 60 million will mature in the forthcoming period and must be refunded with a new issue of bonds. The new 10 year bonds will have a coupon rate of 10% and are expected to sell for $900. Solar utilizes preferred stock as a financing source, and has 300,000 shares of $100 par value
Calculate the cost of preferred stock.
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