Seven Eleven Stores is planning an expansion project that it desires to finance with newly issued...
Seven Eleven Stores is planning an expansion project that it desires to finance with newly issued preferred stock. The firm has an outstanding issue of preferred stock that pays a dividend of $4.25 per share, which is trading for $65 per share. The investment bankers have advised Seven Eleven that flotation costs will be 8% per share. What will be the cost of the newly issued preferred shares?
Homework Answers
Annual Dividend = $ 4.25, Current Preferred Stock Price = P = $ 65, Flotation Cost = F = 8 %
Let the cost of the newly issued preferred stock be kp
Therefore, P x (1-F) = Annual Dividend / kp
kp = [4.25/{65 x (1-0.08)}] = 0.07107 or 7.107 % ~ 7.11 %
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