Algebra word problem, algebra homework help

Algebra
Tutor: None Selected Time limit: 1 Day

A preferred stock is selling for $27.50 a share. The firm nets $25.60 after issuance costs. The stock pays an annual dividend of $3.00 per share. What is the cost of existing, and new, preferred stock respectively?
Jan 12th, 2016

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SOLUTION

Current price of each preferred stock = $27.50


Net price after issuance costs = $25.60


Hence floatation costs = 27.50 – 25.60 = $1.90


Dividends per share = $3.00


 


To calculate the cost of existing preferred stock:


 


Cost of existing preferred stock =  X 100 


    =  X 100 = 0.10909 X 100 = 10.909%


To calculate the cost of new preferred stock:


 


Cost of new preferred stock =  X 100


             =  X 100 =  X 100 = 0.1172 X 100 = 11.72%


Please let me know if you need any clarification. I'm always happy to answer your questions.
Jan 12th, 2016

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