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. |