The cost of the preferred stock of Travis Industries is $13.06
Preferred stocks are the stocks that are given some priority. Some of these preferential treatments include constant dividends, and dividends are paid before any other stockholders. The dividends payable to the holders of preferred stocks are payable on demand.
A publicly traded company incurs flotation costs when it issues new securities and pays costs like underwriting fees, legal fees, and registration fees. Businesses must take into account how these fees will affect the amount of capital they can raise from a new issue.
The cost associated with preferred stock is estimated as follows:
[tex]\text{Cost of the preferred stock}=\dfrac{\text{Annual dividends}}{\text{Current price-Flotation costs}}[/tex]
From the question,
Flotation cost is 7%*90.5
Market price=90.5
Annual dividends=$11.00
[tex]\text{Cost of the preferred stock}=\dfrac{11.00}{90.5*(1-0.07)}[/tex]
[tex]\text{Cost of the preferred stock}= $13.06[/tex]
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