The required return of a preferred stockholder,r_ps,is higher than the cost of preferred stock for the corporation because stockholder's must pay federal taxes on their dividend income.

Question

Quizplus · Accepted Answer

The cost of preferred stock for a corporation already takes into account the fact that preferred stock dividends are not tax deductible. Therefore, the required return of a preferred stockholder is not higher than the cost of preferred stock for the corporation due to taxes.

The Required Return of a Preferred Stockholder,rps,is Higher Than the Cost

The Required Return of a Preferred Stockholder,r_ps,is Higher Than the Cost