(Cost of preferred stock) The preferred stock of Gator Industries sells for $35.

Question

(Cost of preferred stock) The preferred stock of Gator Industries sells for $35.84 and pays $2.75 per year in dividends. What is the cost of preferred stock financing? If Gator were to issue 519,000 more preferred shares just like the ones it currently has outstanding, it could sell them for $34.84 a share but would incur floatation costs of $2.76 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

Hi,

Please find the detailed answer as follows:

Part A :

Cost of Preferred Stock = 2.75/35.84*100 = 7.67%

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Part B:

Cost of preferred stock financing (flotation cost) = 2.75/(34.85 - 2.76)*100 = 8.57%

Thanks.

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