Steve and Styles (S&S) are constructing its Marginal Cost of Capital (MCC) schedule. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. S&S bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,000. S&S could sell, at par, $100preferred stock which pays a 12 percent annual dividend, but flotation costs of 5 percent would be incurred. Steve growth firm which just paid a dividend of $2.00, sells for $27.00 per share, and has a growth rate of 8 percent. The S&S’s policy is to use a risk premium of 4 percentage points when using the bond-yield-plus-risk-premium method to find ks. The S&S's net income is expected to be $1 million, and its dividend payout ratio is 40 percent.
What is S&S cost of preferred stock?
What do you think about MCC?