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Cost of preferred stock, cost of equity

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1. Tunney Industries can issue perpetual preferred stock at a price of \$50 a share.
The issue is expected to pay a constant annual dividend of \$3.80 a share. The flotation cost on the issue is estimated to be 5 percent. What is the company's cost of preferred stock, rps?

2. The Bouchard Company's current EPS is \$6.50. It was \$4.42 5 years. The company pays out 40 percent of it's earnings as dividends, and the stock sells for \$36.

a. Calculate the past growth rate in earnings.

b. Calculate the next expected dividend per share, D1. (D0=0.4(\$6.50)=\$2.60.) Assume that the past growth rate will continue.
c. W hat is the cost of equity, rs, for the Bouchard Company?

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Solution Preview

1. Tunney Industries can issue perpetual preferred stock at a price of \$50 a share.
The issue is expected to pay a constant annual dividend of \$3.80 a share. The flotation cost on the issue is estimated to be 5 percent. What is the company's cost of preferred stock, rps?

Price at which issued= \$50
Floatation cost= 5%
Price realized per share= \$47.50 = (100%-5%) x 50
Annual dividend= \$3.80
Therefore, cost of ...

Solution Summary

The solution calculates
1) cost of preferred stock, given constant annual dividend, flotation cost and price of preferred stock
2) past growth rate in earnings, next expected dividend per share, cost of equity.

\$2.19