William can sell 8% preferred stock at %105 per share.  The cost of  issuing and selling the stock is $5/ share. 

What is the cost of preferred stock

I thought it is 105* 8% = 8.4   8.4/105-5   = 8.4%  which is wrong.  Why?

Try this

Amount Effectively paid by William = 8

Note that it should be 100 *8% (not 105 * 8%) , the interest is always on the Face value

Total Received = 105-5

Rate =8.0% for year 1

Don't know if this is correct

The answer is 8%?????

I am confused again!

I thought it should be 8.4%

Anybody can help clear?

Hey,

I think the answer is 8.4%. It is like calclulating the effective interest. Basically, both calculations that you have shown are needed. I think this is how is works:

8%*105= $8.4 (this the amount of dividend that will be paid by william)

$8.4/105-5= 8.4% (this is the cost. It is the total dividend that william paid divided by the net amount that he received).

I hope that this makes sense to you! If not check out page 45 in the becker text book.