[jdiiorio]

Hi All,

I am having some trouble with anything that has to do with cost of preferred stock and cost of retained earnings. Here is one of the hwk questions regarding preferred stock that I am having trouble figuring out.

William can sell 8% preferred stock at par value, $105 per share. The Cost of issuing and selling the preferred stock is expected to be $5 per share.

Preferred capital structure: debt 30%, preferred stock 20%, common stock 50%.

This is only part of the question, but in the answer it specifies that the cost of preferred stock is 8.4%, which is then multiplied by the 20% to get part of the WACC.

Can anyone help me understand how they got 8.4%? The becker explanation was $105 p/share minus cost of issuing and selling. (not so clear to me)

ILLINOIS CANDIDATE
FAR - Passed
BEC - Passed
AUD - Passed

[luis]

Hope I'm correct in this one, I have BEC in 1 hour, retake after a funny 74.

kps = Dps/Nps ; $105 * 8% = $8.4 Dps (Preferred stock cash dividends), $105 Per share – $5 Cost of issuing & selling = $100 Net proceeds of preferred stock

So kps = $8.4 Dps/$100 Nps = 8.4%

Good luck everyone!

[jdiiorio]

Thanks! Hope your exam went well!

ILLINOIS CANDIDATE
FAR - Passed
BEC - Passed
AUD - Passed

[Author]

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