4. Calculate the cost of preferred stock (rPS) for each of the following: Show w
ID: 2667991 • Letter: 4
Question
4. Calculate the cost of preferred stock (rPS) for each of the following:
Show work
Preferred Stock Par Value Current Price (Po) Flotation Cost Annual Dividend(% of Par)
A $100 $101 $9.00 11%
B $40 $38 $3.50 8%
C $35 $37 $4.00 $5.00
D $30 $26 5% of par $3.00
E $20 $20 $2.50 9%
Explanation / Answer
Calculating the cost of preferred stock: The formula for calculating the cost of preferred stock is Cost of Preferred stock (Rp) = Annual preferred dividend / Current price of preferred stock A) The flotation cost should be deducted from the current price of preferred stock to arrive at the cost of Preferred stock. The formula turns into Cost of preferred stock (Rp) = Annual preferred dividend / (Current price - Flotation cost) = (0.11 * $100) / ($101 - $9) = $11 / $92 = 0.1195 or 11.95% B) Cost of preferred stock (Rp) = (0.08 * $40) / ($38 - $3.50) = $3.2 / $34.5 = 0.093 or 9.3% C) Cost of preferred stock (Rp) = $5 / ($37 - $4) = $5 / $33 = 0.1515 or 15.15% D) Cost of preferred stock (Rp) = $3 / [$26 - (0.05*$30)] = $3 / $24.5 = 0.1224 or 12.24% E) Cost of preferred stock (Rp) = (0.09 * $20) / ($20 - $2.5) = $1.8 / $17.5 = 0.1029 or 10.29%Related Questions
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