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Answer :
The cost of preferred stock that pays annual dividend SR 6, has issue price SR 40, and incurs flotation costs of SR 3 per share is 16.22%.
The cost of preferred stock can be calculated using the formula: Cost of preferred stock = Annual dividend / Net proceeds per share where net proceeds per share = Issue price - Flotation costs per share.
The cost of preferred stock can be calculated using the following formula:
Cost of preferred stock = Annual dividend / Net proceeds per share
Where net proceeds per share = Issue price - Flotation costs per share
Given that the annual dividend is SR 6, the issue price is SR 40 and the flotation costs are SR 3 per share, we can calculate the net proceeds per share as follows:
Net proceeds per share = Issue price - Flotation costs per share
= SR 40 - SR 3
= SR 37
Now we can calculate the cost of preferred stock as follows:
Cost of preferred stock = Annual dividend / Net proceeds per share
= SR 6 / SR 37
= 0.1622 or 16.22%
Therefore, the cost for a preferred stock that pays annual dividend SR 6, has issue price SR 40, and incurs flotation costs of SR 3 per share is 16.22%.
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