Bosio inc.'s perpetual preferred stock sells for $120.00 per share, and it pays an $8.50 annual dividend. if the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. what is the company's cost of preferred stock for use in calculating the wacc?

WACC is defined as the weighted average cost of capital. It is the rate at which a firm is projected to pay all of its security holders on average to finance its assets.

The firm's cost of capital is frequently referred to as the WACC. It is important to note that the external market, not management, determines this.

The formula of WACC is:

[tex]\text{Weighted Average Cost of Capital (WACC)} = \dfrac{\text{Annual Dividend}}{\text{Sales price of Proffered Stock} - \text{Sales price} \times \text{FC}}[/tex]

According to the given information,

Annual Dividend = $8.50,

Sales price of Proffered Stock =$120.

Flotation Cost(FC) = 4%.

Now, putting the values in the formula of WACC,

[tex]\text{Weighted Average Cost of Capital (WACC)} = \dfrac{\text{Annual Dividend}}{\text{Sales price of Proffered Stock} - \text{Sales price} \times \text{FC}}\\\\\text{Weighted Average Cost of Capital (WACC)} =\dfrac{8.5}{\$120- (\$120 \times 4\%)}\\\\\text{Weighted Average Cost of Capital (WACC)} =0.074(Approx.)[/tex]

Then, the WACC in terms of percentage is 7.4%.

Learn more about WACC, refer to:

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