4. The calculation of the cost of preferred stock Firms that carry preferred stock in their capital mix want to not only distribute dividends to common stockholders but also maintain credibility in the capital markets so that they can raise additional funds in the future and avoid potential corporate raids from preferred stockholders. Ten years ago, Happy Lion Manufacturing issued a perpetual preferred stock issue-called PS Alpha-that pays a fixed dividend of $6.50 per share and currently sells for $100 per share. Happy Lion's management team is considering issuing a second issue of perpetual preferred stock. If the new issue-tentatively called PS Beta-is actually sold, the company will incur an underwriting (or flotation) tost of 5.20%. In addition, the underwriters are anticipating the need to pay a dividend of $17.00 per share to attract new investors, and is expecting to sell the new shares for $90.00 per share. As a component in Happy Lion's weighted average cost of capital, ps Alpha thares currently exhibit a cost of: 6.50% 7.48% 5.5376 4. 88% If Happy won elects to issue its ps Beta shares, it will bay per share in flotation costs, and will receive net proceeds of share from its underwriters As a component in Happy Lion's weighted average cost of capital, PS Alphs shares currently exhibit a cost of: 6.50% 7.48% 5.53\% 4,88% If Happy Lion elects to issue its P5 Beto shares, it will pay per share in flotation costs, and will receive net proceeds of share from its underwriters. Based on its underwriters' best estimates of the issue's expected future dividend and market price, the marginal cost of the pS beta issue is expected to be: 26.89% 14,94% 25.904 19.92% Companies make tax adjustments when calculating the (after tax) cost of preferred stock becouse preferred dividends tax deductible, so the company bears their full cost