Chapter 11, Problem 4PROB

Summary Introduction

Cost of preferred stock:

It is the cost to be incurred for issuing the preferred stock. Cost of preferred is the ratio of the preference dividend to price of the preference share.

Calculate the preferred stock as follows:

$\text{Cost of preferred stock}=\frac{\text{Preference dividend}}{\text{Current price}\times \left(1-\text{Flotation cost}\right)}$

JJ plans to issue preferred stock with current market value of $50 and preference dividend $4.75. Flotation cost is given is 5% and number of shares issued is 10,000.