To calculate the cost of the new preferred issue, we need to consider the dividend yield and the flotation cost.
1. Start by calculating the dividend yield:
Dividend yield = Annual dividend per share / Market price per share
= $6.00 / $80
= 0.075 or 7.5%
2. Next, calculate the flotation cost as a percentage of the market price:
Flotation cost = Flotation cost % * Market price per share
= 0.04 * $80
= $3.20 per share
3. Subtract the flotation cost from the annual dividend per share:
Net annual dividend per share = Annual dividend per share - Flotation cost per share
= $6.00 - $3.20
= $2.80
4. Finally, divide the net annual dividend per share by the market price per share to get the cost of capital:
Cost of capital = Net annual dividend per share / Market price per share
= $2.80 / $80
= 0.035 or 3.5%
Therefore, the cost of the new preferred issue would be 3.5%.