Questions: Milton Corporation gives the preferred stockholders an annual dividend of 5 per share. Each share of stock sells for 100 and selling costs of 3. What is the company's cost of preferred stock? (Round the answer to two decimal places.)

Solution Steps

To find the company's cost of preferred stock, we need to calculate the dividend yield. This is done by dividing the annual dividend by the net proceeds from selling the stock (which is the selling price minus the selling costs). Finally, we multiply the result by 100 to express it as a percentage.

The net proceeds from selling the preferred stock can be calculated as follows: \[ \text{Net Proceeds} = \text{Selling Price} - \text{Selling Costs} = 100 - 3 = 97 \]

The cost of preferred stock is determined by the formula: \[ \text{Cost of Preferred Stock} = \frac{\text{Annual Dividend}}{\text{Net Proceeds}} \times 100 \] Substituting the known values: \[ \text{Cost of Preferred Stock} = \frac{5}{97} \times 100 \approx 5.154639175257731 \] Rounding this to two decimal places gives: \[ \text{Cost of Preferred Stock} \approx 5.15 \]

Final Answer