Apply It$-$ Ch $09$ Assignment $-$ The Cost of Capital

Happy Lion Manufacturing Inc. has preferred stock that pays a dividend of $$5$ per share and sells for $$100$ per share. It is considering issuing new shares of preferred stock. These new shares incur an underwriting $($or flotation$)$ cost of $2\mathrm{.}7\%.$

How much will Happy Lion Manufacturing Inc. pay per share to the underwriter?

$$2\mathrm{.}97$ per share

$$2\mathrm{.}70$ per share

$$97\mathrm{.}30$ per share

$$87\mathrm{.}57$ per share

Based on this information, what is Happy Lion Manufacturing Inc.$\text{'}$s cost of preferred stock capital?

$4\mathrm{.}63\%$

$4\mathrm{.}11\%$

$5\mathrm{.}14\%$

$4\mathrm{.}88\%$

Companies $$ make tax adjustments when calculating the $($after$-$tax$)$ cost of preferred stock because preferred dividends

$$ tax deductible, so the company bears their full cost.