The dividends paid on a preferred stock issue are $4 per share, the tax rate is 40%, the price is $32 and there will be $2/share in flotation costs. Calculate the cost of the preferred stock.
A) 13.3%
B) 12.33%
C) 12%
D) 7.98%

Question

Quizplus · Accepted Answer

The cost of the preferred stock is calculated as follows:Cost of preferred stock = (Dividends / (Price - Flotation costs)) * (1 - Tax rate)= (4 / (32 - 2)) * (1 - 0.40)= 0.1333 or 13.33%

The Dividends Paid on a Preferred Stock Issue Are $4