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Preferred Stock and Cash Discounts

Question 1: Your firm, People's Consulting Group, has been asked to consult on a potentially preferred stock offering by Brave New World. This 15% preferred stock issue would be sold at its par value of $35 per share. Flotation costs would total $3 per share. Calculate Brave New World's cost of preferred stock.

Question 2: Initiating a cash discount. Gardner Company currently makes all sales on credit and offers no cash discount. The firm is considering offering a 2% cash discount for payment within 15 days. The firm's current average collection period is 60 days, sales are 40,000 units, selling price is $45 per unit, and variable cost per unit is $36. The firm expects that the change in credit terms will result in an increase in sales to 42,000 units, that 70% of the sales will take the discount, and that the average collection period will fall to 30 days. If the firm's required rate of return on equal-risk investments is 25%, should the proposed discount be offered? (Note: Assume a 365-day year.)

Solution Summary

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$2.19