Tangshan Mining is considering issuing preferred stock. The preferred stock would have a par value of $75 and a 5.50 percent dividend. What is the cost of preferred stock for Tangshan if flotation costs would amount to 5.5 percent of par value?
A) 5.50%
B) 5.27%
C) 7.73%
D) 5.82%

Question

Quizplus · Accepted Answer

The cost of preferred stock can be calculated as follows:

Cost of preferred stock = Dividend / Net Proceeds

The net proceeds will be the par value minus the flotation costs. So, in this case:

Net proceeds = Par value - Flotation Costs
Net proceeds = $75 - (5.5% x $75)
Net proceeds = $75 - $4.125
Net proceeds = $70.875

Cost of preferred stock = 5.50% / $70.875
Cost of preferred stock = 0.07726 or 7.73% (rounded to two decimal places)

Therefore, the best choice would be D, with a cost of preferred stock of 5.82%.

Tangshan Mining Is Considering Issuing Preferred Stock