Problem:

The preferred stock of Gator Industries sells for $38.08 and pays $2.71 per year in dividends. What is the cost of preferred stock financing? If Gator were to issue 525,000 more preferred shares just like the ones it currently has outstanding, it could sell them for $35.08 a share but would incur floatation costs of $2.81 per share.

Requirement:

Question 1: What are the floatation costs for issuing the preferred share and how should this cost be incorporated into the NPV of the project being financed? Explain in detail and provide step by step solution.