Gem Systems has recently issued preferred stock. The stock has a 12% annual divi
ID: 2667784 • Letter: G
Question
Gem Systems has recently issued preferred stock. The stock has a 12% annual dividend based on a par value of $100 per share. The stock is currently selling for $97.50 per share in the secondary market (so that Po = $97.50). Finally, flotation costs of $2.50 must be paid for each new share Gem Systems issues.(a) Calculate the cost of preferred stock based on the outstanding issue, given the current market price.
(b) If Gem Systems sells a new issue of preferred stock carrying a par value of $100 but with an annual dividend of 10% of par, what is the cost of this newly issued preferred stock if the firm nets $90.00 per share after flotation costs?
Explanation / Answer
(a) Cost of preferred stock = Preferred dividend/Current market price of the preferreds stock Preferred dividend 12% on par value of the share. that is $12. Current market price is $97.50 Cost of preferred stock = $12/$97.50 =0.1230 =12.3% Cost of preferred stokc is 12.3%. (b) Flotation costs are $10.($100-$90). which is 10% on stock carring a par value. = 100 - 10% =90% This is nothing but market price of the preferred stock. which is 90%*100 =$90 Cost of newly issued preferred stock = Dividend paid/Market price of the preferred stock = $10/$90 =0.1 Cost of newly issued preferred stock is 10%.Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.