Answer to Question #151786 in Finance for henry

Question

Suppose a company wishes to issue 12% preference shares at N$1 each. The preference shares currently trade at 85.75 cents and floatation costs are 5 cents per share. Determine the cost of preference shares.

Answer 1

To get the floatation rate ;

F=5 cents per share

Current preference rate =85.75cents

Floatation rate =$(\frac{5}{85.75}×100)$

=5.83%

The cost of preference share is therefore 12%

=85.75(1-0.0583)

=14.87