(Cost of preferred stock) The preferred stock of Gator Industries sells for %34.

Question

(Cost of preferred stock) The preferred stock of Gator Industries sells for %34.85 and pays $2.76 per year in dividends. What is the cost of preferred stock financing? IF Gator were to issue 458,000 more preferred shares just like the ones it currently has outstanding, it could sell them for $34.85 a share but would incur floatation costs of $2.87 per share. What are the floatation costs for issuing the preferred shares and how should this cost be incorporated into the NPV of the project being financed? The firm

Explanation / Answer

Otherwise, it can take CoC as 7.92% and take the floation cost (458000*2.87) as an outflow while calculating the NPV.

Cost of Preferred Stock=Dividend/Price=(2.76/34.85)*100 7.92 If the floation Cost 2.87 , the net receipt amount=34.85-2.87 31.98 Cost of new Preferred Stock=(2.76/31.98)*100 8.63 Weighted Average Cost=0.5*7.92+0.5*8.63 8.275 So the CoC is 8.275 for the calculation of NPV

Related Questions

Navigate

• Browse (All)
• Browse #
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.