The cost of preferred stock

Firms that carry preferred stock in their capital structure 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.

Consider the case of Blue Panda Ice Cream Company:

Blue Panda has preferred stock that pays a dividend of $5.00 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 1.30%.

How much will Blue Panda pay to the underwriter on a per-share basis?

$88.83

$1.30

$98.70

$1.43

After it pays its underwriter, how much will Blue Panda receive from each share of preferred stock that it issues?

$88.83

$1.30

$1.43

$1.11

$98.70

Based on this information, Blue Panda's cost of preferred stock is