Background: Company A has 15 year 8% annual coupon bonds outstanding. Current ma

Question

Background:

Company A has 15 year 8% annual coupon bonds outstanding. Current market bond price is 885.54 and a FV of 1,000. Marginal tax rate is 40% and after-tax component cost of debt is 5.91%.

Question:

Company A is considering issuing shares of perpetual preferred stock. The preferred stock would have a face value of $100 per share and pay a fixed annual dividend of $7.20 per share. The flotation cost associated with issuing this preferred stock is 4% of each share's face value. What is Bennington's cost of preferred stock (rp)?

Thanks -- please show your work.

Explanation / Answer

7.2/[100x(1-.04)]= 7.5%

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