Component Cost of Newly Issued Preferred Stock

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The component cost of preferred stock is the dividend divided by issue price minus floatation cost. In this case the component cost of preferred stock = $10 / (100

- 2.5) = 10.26%.

To calculate the component cost of the newly issued preferred stock, we need to consider the dividend yield on the preferred stock and the flotation cost.

The dividend yield on preferred stock is calculated by dividing the preferred dividend by the preferred stock price:

Dividend Yield = Preferred Dividend / Preferred Stock Price

In this case, the preferred dividend is $10 and the preferred stock price is $100. So the dividend yield is:

Dividend Yield = $10 / $100 = 0.1 or 10%

Now, let's calculate the cost of issuing preferred stock considering the flotation cost. The flotation cost is the percentage of the par value of the preferred stock that is paid as fees and expenses when issuing the stock.

Flotation Cost = Preferred Stock Flotation Cost / 100

In this case, the preferred stock flotation cost is 2.5%. So the flotation cost is:

Flotation Cost = 2.5% / 100 = 0.025 or 0.025

To calculate the component cost of the newly issued preferred stock, we use the following formula:

Component Cost = Dividend Yield / (1 - Flotation Cost)

Plugging in the values we calculated earlier:

Component Cost = 0.1 / (1 - 0.025) Component Cost = 0.1 / 0.975 Component Cost = 0.1026 or 10.26%

Therefore, the component cost of this newly issued preferred stock is 10.26%.