(Cost of preferred stock) The preferred stock of Gator Industries sells for $38.

Question

(Cost of preferred stock) The preferred stock of Gator Industries sells for $38.08 and pays $2.71 per year in dividends. What is the cost of preferred stock financing? If Gator were to issue 525,000 more preferred shares just like the ones it currently has outstanding, it could sell them for $35.08 a share but would incur floatation costs of $2.81 per share. What are the floatation costs for issuing the preferred share and how should this cost be incorporated into the NPV of the project being financed?

Explanation / Answer

Price 35.08 Dividends 2.71 Cost of preffered Stock financing= dividend /Price 0.077252 Cost of preffered Stock financing 7.73% Price of new share 35.08 Floatation costs 2.81 Net price 32.27 Dividen 2.71 Cost of preffered Stock financing= dividend /Price 0.08397893 Cost of preffered Stock financing 8.40% Project should be discounted using average of 7.73% and 8.40% for calculating NPV which is 8.05% as shown below Partciulars No of shares Price Total Weight Cost of preffered stock %WACC Old    525,000.00         35.08    18,417,000.00                       0.52 7.73%    0.040263 New    525,000.00         32.27    16,941,750.00                       0.48 8.40%    0.040248    35,358,750.00      0.08051 Assuming old and new shares are equal

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