What Is the Cost of Preferred Stock for Foggy Futures

question 89

Multiple Choice

What is the cost of preferred stock for Foggy Futures Weather Forecasters? The firm is in the 40% tax bracket. The optimal capital structure is listed below: ? $$\begin{array} { | l | l | } \hline \text { Source of Capital } & \text { W eight } \\\hline \text { Long-Term Debt } & 25 \% \\\hline \text { Preferred Stock } & 20 \% \\\hline \text { Common Stock } & 55 \% \\\hline\end{array}$$ ? $\begin{array}{|l|l|}\hline \text { Debt: }&\begin{array}{ll}\text {The firm can issue \( \$ 1,000 \mathrm{p} \) ar value, \( 8 \% \) coupon interest bonds with a 20 -year }\\\text {maturity date. The bond has an average discount of \( \$ 30 \) and flotation costs of }\\\text { \( \$ 30 \) per bond. The selling price is \( \$ 1,000 \) .}\end{array}\\\hline \text {Preferred Stock: }&\begin{array}{ll}\text {The firm can sell preferred stock with a dividend that is \( 8 \% \) of the current price. }\\\text { The stock costs \( \$ 95 \) . The cost of issuing and selling the stock is expected }\\\text {to be \( \$ 5 \) per share. }\end{array}\\\hline \text {Common Stock: }&\begin{array}{ll}\text {The firm's common stock is currently selling for \( \$ 90 \) per share. }\\\text {The firm's common stock is currently selling for \( \$ 90 \) per share. The firm expects to pay cash dividends }\\\text { The dividends have been growing at \( 6 \% \) . The stock must be discounted by \( \$ 7 \) , }\\\text {and flotation costs are expected to amount to \( \$ 5 \) per share. }\end{array}\\\hline \text { Retained Earnings:}&\begin{array}{ll}\text { The firm expects to have enough retained earnings in the coming year to be used}\\\text { in place of any new stock being issued. }\end{array}\\\hline \end{array}$

• A) 4.9%
• B) 11.55%
• C) 7.88%
• D) 8.44%

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Definitions:

Journal Entries

The method by which financial transactions are recorded in an accounting system, typically involving a debit to one or more accounts and a credit to another in equal amounts.

Shares Outstanding

The total number of shares of a corporation's stock that are currently owned by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders.

Par Value

A nominal value assigned to a share of stock in the charter of a corporation, which is the minimum legal capital per share.

Common Share

A unit of equity ownership in a corporation, granting holders voting rights and a share in the profits through dividends.