CFA Practice Question

CFA Practice Question

A firm issues preferred stock for $60 per share. The stock pays a dividend of $4.50 yearly. The firm has to pay flotation costs of 7% on the issue price. What is the firm's cost of preferred stock?
A. 0.07
B. 0.075
C. 0.08065
Explanation: cost of preferred stock = $4.50 / ($60 * (1 - 0.07))

User Contributed Comments 3

User Comment
mandirigma it should be A!
4.50/64.2 = 0.07
chandsingh It is actually 4.5/55.8 = 0.080645.
55.8 = (60 *(1-0.07))
Flotation costs above 1% are deducted from price
nathandrake Aren't flotation costs a one-time cost? It should only be taken into consideration when computing NPV (treating flotation costs as an initial cash outflow). Hence, I chose B.
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