Felix wants to have $28,000 four years from now to buy a new car. He wants to ma

Question

Felix wants to have $28,000 four years from now to buy a new car. He wants to make one deposit to fund this expenditure. How much does he have to deposit if he will earn 5.5% per year on his investment?

$22,602.07

$24,354.09

$25,608.12

$22,125.16

XYZ plans to issue some $60 par preferred stock with a 6% dividend. A similar stock is selling on market for $70. XYZ must pay flotation costs of 5% of the issue price. What is the cost of the preferred stock?

5.99%

5.41%

6.3%

4.99%

1.

$22,602.07

2.

$24,354.09

3.

$25,608.12

4.

$22,125.16

XYZ plans to issue some $60 par preferred stock with a 6% dividend. A similar stock is selling on market for $70. XYZ must pay flotation costs of 5% of the issue price. What is the cost of the preferred stock?

1.

5.99%

2.

5.41%

3.

6.3%

4.

4.99%

Explanation / Answer

Solution.

1. Calculation of investment Amount.

$22,602.07

2.

2.5.41%

flotation costs of 5% = 5%/100 = .05

Subtract the decimal of the flotation cost from 1 = 1- .05 = .95

Multiply the market price for the preferred stock by one minus the flotation cost. = market price $70 x .95 = 66.5

Divide the dividend paid by the preferred stock by this number = $3.60 / 66.5 = .0541 or 5.41%

                                           

year Investment Interest rate Interest Amount 1           22,602 5.50%      1,243.11          23,845.18 2           23,845 5.50%      1,311.49          25,156.67 3           25,157 5.50%      1,383.62          26,540.29 4           26,540 5.50%      1,459.72          28,000.00

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