Trina Industries plans to issue a perpetual preferred stock with an $11.00 divid

Question

Trina Industries plans to issue a perpetual preferred stock with an $11.00 dividend. Stock currently sells for $97.00, but floatation cost will be 5% of the market price, so the net price would be $92.15/share. What is the cost of preferred stock including floatation?

Trina Industries plans to issue a perpetual preferred stock with an $11.00 dividend. Stock currently sells for $97.00, but floatation cost will be 5% of the market price, so the net price would be $92.15/share. What is the cost of preferred stock including floatation?

Explanation / Answer

Price*(1-floatation cost) = dividend/cost of preferred stock

97*(1-5%) =11.00/cost of preferred stock

cost of preferred stock = 11.00/(97*(1-5%)) = 11.94%

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