The preferred stock of gator industries sells for $35.86 and pays $2.72 per year

Question

The preferred stock of gator industries sells for $35.86 and pays $2.72 per year in dividends. what is the cost of preferred stock financing? if gator were to issue 483,000 more preferred shares just like the ones it currently has outstanding. it could sell them for $35.86 a share but would incur flotation costs of $2.83 per share. what are the flotation costs for issuing the preferred shares and how should this cost be incorporated into the npv of the project being fmanced? the firm's cost of preferred stock financing is?

a. The firms cost of preferred stock financing is _____%

b. The flotation costs adjusted initial outlay for issuing the preferred shares are $_____

Explanation / Answer

Cost of preferred stock = Annual preferred dividend/ price

                                                = 2.72/ 35.86

                                                = 7.59%

Floatation cost for issuing preferred stock includes underwriting fees, brokerage, listing expenses etc. The floatation cost is added in the initial cost of the project. The total amount adjusted would be the floatation cost per share times number of shares issued.

Floatation cost adjustment = 483,000 x $2.83

                                                      = 1,366,890

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