Question

Cost of preferred stock Taylor Systems has just issued preferred stock. The stock has an 8% annual dividend and a $100 par value and was sold at $99.50 per share. In addition, flotation costs of $1.50 per share must be paid. a. Calculate the cost of the preferred stock. b. If the firm sells the preferred stock with a 10% annual dividend and nets $90.00 after flotation costs, what is its cost? c. Using the constant-growth valuation model, determine the required return on the company's stock, rs, which should equal the cost of retained earnings, mr. d. Using the constant-growth valuation model, determine the cost of new common stock, mn. (2 pts)

Answer 1

a.Cost of the Preferred Stock

Par Value=$100

Annual dividend=8%*100=$8.00

Selling Price =$99.50

Flotation cost =$1.50

Net Cash received per share=99.50-1.50=$98

Cost of the Preferred Stock=8/98=0.0816

Cost of the preferred stock=8.16%

b.

Annual dividend=10%*100=$10..00

Selling Price (Net)=$90.00

Net Cash received per share=$90.00

Cost of the Preferred Stock=10/90=0.1111

Cost of the preferred stock=11.11%

Data on common stock and dividend growth rates are not available.

Hence, c and d cannot be answered