(cost of preferred stock) The preferred stock of Gator Industries sells for $34.
ID: 2613480 • Letter: #
Question
(cost of preferred stock) The preferred stock of Gator Industries sells for $34.07 and pays $2.72 per year in dividends.What is the cost of preferred stock financing? If Gator were to issue 477,000 more preferred shares just like the ones it currently has outstanding, it could sell them for $34.07 a share but would incur flotation costs of $3.14 per share. What are the flotation costs for issung the preferred shares and how should this cost be incorporated into the NPV of the project being financed?
a. The firm's cost of preferred financing is ? %.
b.The floation costs adjusted initial outlay for issusing the preferred share are ?$.
Explanation / Answer
a. Cost of Preferred Stock = Rps = Dps / Pnet
where Dps = preferred dividend, Pnet = net issuing price
Rps = $2.72/$34.07 = 7.98%
Therefore, firm's cost of preferred financing is 7.98%
b. Flotation cost adjusted initial outlay = Financing Need / (1 - Flotation cost as a percent)
= 477000 * $34.07 / (1 - 3.14%)
= $16251390 / 0.9686
= $16778226.31
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