Finance Assignment Paper: Cost Of Preference Stock (Essay Sample)

Finance
Name
Institution
Introduction
The cost of the preferred stock is described as the acceptable rate of return which the preference shareholders are entitled to receive as an appreciation for the investing in the organization. Companies pay the preference shares before the ordinary shares. The preference shares are paid to the shareholders at the end of every financial year (Petty et al, 2015). In most instances, these dividends are fixed and hence are paid in perpetuity.
Cost of preference stock
Selling price= $ 27.5
Net issuance cost = $ 25.6
Floatation cost = $ 27.5- 25.6
= $ 1.90
Dividends= $ 3.00
Cost of existing stock:
KP= DpP0-f
= 327.5
= 10.909%
The new stock will be:
KP= DpP0-f
= 327.5-1.9
= 11.719%
The cost of the preference shares will increase by
= 11.719%-10.909
= 0.81%
The cost of the preferred cost is obtained by dividing the preference dividends by the price of the share, which is subtracted from the floatation cost. Toto and Associates issued the preference shares at a floatation cost of $ 1.90, hence the increased cost of the preference shares. The preference shares increased by 0.81%, which can be interpreted that the company will be required to pay more to the preferred shareholders when compared to the investment at the beginning of the year (Petty et al, 2015). The increase in cost is a liability to the company since it will be required to pay more to its shareholders. The floatation cost is c...