What is the cost of preferred stock financing for Palmetto Corporation if the dividend is 9% and flotation costs are 3%?

To determine the cost of preferred stock financing, you need to consider both the dividend payment to preferred stockholders and the flotation costs associated with issuing the preferred stock.

The cost of preferred stock can be calculated using the formula:

[ \text{Cost of Preferred Stock} = \frac{D}{P(1 - F)} ]

where:

• (D) is the dividend payment,
• (P) is the price at which the preferred stock is sold, and
• (F) is the flotation cost as a percentage of the price.

In this scenario, the dividend percentage is 9%, meaning the company pays 9% of the par value in dividends. The flotation costs of 3% mean that when the company issues the preferred stock, it will only receive 97% of the value of the stock due to the costs associated with this issuance.

If we assume the preferred stock has a par value of $100 for calculation, the dividend is:

[ D = 9% \times 100 = 9 ]

With flotation costs of 3%, the effective price or amount the company receives for the stock will be:

[ P(1 - F) = 100(