Aplia: Student Question .iowmuchy wil ?id >. /al/servlet/quiz2quiz action-take Q

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Aplia: Student Question .iowmuchy wil ?id >. /al/servlet/quiz2quiz action-take Quiz&quiz; probGuid-ONAPCOA801010000041cdaa800700008ctx-robert2-00398icke-m 15 4. The cost of preferred stock Firms that carry preferred stock in their capital mix want to not only distribute dividends to common stockholders but also maintain credibility in the capital markets so that they can raise additional funds in the future and avoid potential corporate raids from preferred stockholders Consider the case of Red Oyster Seafood Company Red Oyster Seafood Company has preferred stock that pays a dividend of $6 per share and sells for $100 per share it is considering issuing new shares of preferred stock. These nety shares incur an underwriting (or flotation) cost of 1.3%. How much will Red Oyster Seafood Company pay per share to the underwriter? Based on this information, what is Red Oyster Seafood Company's cost of preferred stock capital? $98.70 O $1.30 o 6.38% ? 6.08% 0 s, 17% ? 6.69% $98.83 $1.43 Companies preferred dividends make tax adjustments when calculating the (after-tax) cost of preferred stock because tax deductible, so the company bears their foil cost Save s

Explanation / Answer

Flotation cost per share = Share price x flotation = $100 x 1.3% = $1.30

Cost of preferred stock = Dividend / (Share price - Flotation) = $6 / ($100 - $1.30) = 0.06079 or 6.079% or 6.08%

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