PNC also raises capital with preferred stock. Data on preferred stock are also p

Question

PNC also raises capital with preferred stock. Data on preferred stock are also provided in Table 1. If PNC finances with preferred, which type should it choose, and what would its cost be for the WACC calculation? Is the relationship between the yields on the two preferreds, and between the preferreds and debt, consistent with their risks to investors? Would an increase in the percentage flotation cost have a greater impact on the sinking fund or perpetual preferred? Information below to help:

PNC has one issue of preferred stock outstanding, a perpetual and non-callable preferred that pays a $6.25 annual dividend, has a $100 par value, and currently sells for $104 per share. Investment bankers have indicated that PNC could sell additional shares with a dividend rate that would provide the same market yield, but would incur a flotation cost of 2%. Also, it could sell at par an issue of sinking fund preferred with an annual coupon of 5.25%. The sinking fund would require the company to retire 10% of the original shares each year after issuance, and it too would have a 2 percent flotation cost.

Explanation / Answer

Non-callable preferece stock is considered for computation of WACC.

More over, the preferred shares have to be valued at market value for computation of WACC.

No, there is nothing like relationship that affects the preferred stock and debt.

But, in the event of distribution of assets;preference shall be given to debt.

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