Options for blank 1

3.17

2.77

3.96

5.54

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68.83

86.04

103.25

120.46

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Increase

Decrease

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Insignificant

Significant

Consider the case of Cold Duck Brewing Company: Ten years ago, Cold Duck Brewing Company issued a perpetual preferred stock issue-called PS Alpha-that pays a fixed dividend of $7.50 per share and currently sells for $100 per share. Cold Duck'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) cost of 4.40%. In addition, the underwriters are anticipating the need to pay a dividend of $17.50 per share to attract new investors, and is expecting to sell the new shares for $90.00 per share. As a component in Cold Duck's weighted average cost of capital, PS Alpha shares currently exhibit a cost of: 0 7.50% 7.13% 8.63% 0 7.88% If Cold Duck elects to issue its PS Beta shares, it will pay proceeds of per share in flotation costs, and will receive net per 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: 15.26% 26.44% 17.29% 20.34% When raising funds by issuing new preferred stock, the company will incur an underwriting, or flotation, cost that the cost of preferred stock. Because the flotation cost is usually expressed as a percentage of price of each share, the difference between the cost of preferred stock with and without flotation cost is enough to not ignore