LUVFINANCE, Inc. is estimating its WACC. The firm could sell, at par, $100 preferred stock that pays a 10 percent annual dividend and incurs 4.72% flotation costs. What is the cost of new preferred stock financing?

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01-07-2021
Business

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LUVFINANCE, Inc. is estimating its WACC. The firm could sell, at par, $100 preferred stock that pays a 10 percent annual dividend and incurs 4.72% flotation costs. What is the cost of new preferred stock financing?

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codiepienagoya codiepienagoya · Answer 1 · 2021-07-01T16:49:44-04:00

codiepienagoya codiepienagoya

01-07-2021

Answer:

The answer is "10.49%".

Explanation:

Preference inventory values are incurred as described below:

Using formula:

[tex]= \frac{Annual \ \ dividend}{ Price \times (1 - flotation\ cost) ]}[/tex]

[tex]= \frac{\$ 10}{[ \$ 100 \times (1 - 0.0472) ]}\\\\= \frac{\$ 10}{ \$ 100 \times (0.9528) }\\\\= \frac{\$ 10}{ \$ 95.28}\\\\=0.10495\\\\=10.49\%[/tex]

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