Ivey Industries plans to issue a $100 par perpetual preferred stock with a fixed

Question

Ivey Industries plans to issue a $100 par perpetual preferred stock with a fixed annual dividend of 11 percent of par. It would sell for $94.20, but flotation costs would be 10 percent of the market price, making the net price $84.78 per share. What is the percentage cost of preferred stock after taking flotation costs into account?

Ivey Industries plans to issue a $100 par perpetual preferred stock with a fixed annual dividend of 11 percent of par. It would sell for $94.20, but flotation costs would be 10 percent of the market price, making the net price $84.78 per share. What is the percentage cost of preferred stock after taking flotation costs into account?

Explanation / Answer

Annual dividend=(11%*$100)=$11

Hence cost of preferred stock=Annual dividend/Net price

which is equal to

=$11/$84.78

which is equal to

=12.97%(Approx).

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