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BAM 313 – Introduction to Financial Management

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<p align=”center” style=”margin-bottom:10.0pt;text-align:center; line-height:200%”><b>Topic 3. Toto and Associates&rsquo; preferred stock is selling for $27.50 a share. The firm nets $25.60 after issuance costs. The stock pays an annual dividend of $3.00 per share. What is the cost of existing, and new, preferred stock respectively?</b></p>
<p align=”center” style=”text-align:center;line-height:200%; background:white”><b>Introduction</b></p>
<p style=”text-indent:.5in;line-height:200%;background:white”>By definition, the cost of preferred stock refers to the required return rate expected by the preferred shareholders for receiving as a reward for the investment made in the company. In this case, the common shareholders are paid after the preferred shareholders. Note that the company makes payments of the dividends to the shareholders of choice at the end of every period. In most cases, these dividends are fixed and are always paid to perpetuity.</p>
<p align=”center” style=”text-align:center;line-height:200%; background:white”><b>Mathematical Analysis</b></p>
<p style=”text-indent:.5in;line-height:200%;background:white”>By calculation, the cost of preferred cost is equal to preference dividends divided by the price share minus any of the floating cost. Evidently, the company also reveals a difference in the new and the existing cost of the preferred shares. Recently, Toto and Associates company issued a floating cost of 1.90 dollars (new preferred cost). As a result, the cost of preferred shares increased. Precisely, the cost of preferred shares recorded an increase of 0.81%. In effect, there is an indication that the company is likely to pay more to the shareholders that are preferred as compared to their investment at the initial stages. Such an increase negatively impacts on the company.</p>
<p style=”text-indent:.5in;line-height:200%;background:white”>It is given that the net cash = 25.60, sale price = 27.50 dollars, and the coast of floating = 27.50 &ndash; 25.60 = 1.90 dollars. Moreover, the dividends = 3.00 dollars. In this case, the existing stock&rsquo;s cost, Kp = Dp/ (P0 – f) = (3/ 27.5) x 100 = 10.91%. Correspondingly, the new stock&rsquo;s cost, Kp = Dp/ (P0 &ndash; f) = (3/ 25.6) x 100 = 11.72%. In this case, the preferred shares increase in cost = 11.72% &ndash; 10.91% = 0.81%</p>
<p align=”center” style=”text-align:center;line-height:200%; background:white”><b>Conclusion</b></p>
<p style=”line-height:200%;background:white”>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In summary, there is an association of the floating cost with new issues of shares. Such issues result in the increase of the cost of preferred shares. In present times, increasing the cost of the preferred shares shows that the cash outflow and inflows of a company will be small. The market price of the share can also be estimated by the use of the cost of preferred stock.</p>

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