Question

A firm is paying an annual dividend of $2.65 for its preferred stock that is selling for $57.00. There is a selling cost of $3.30. What is the after-tax cost of preferred stock if the firm's tax rate is 21%?

Answer 1

Answer:

The cost of preferred stock is 4.93 percent.

Explanation:

Annual dividend = $2.65

Selling price of preferred stock  = $57

The cost of selling cost = $3.30

Given firm’s tax rate = 21%

The tax rate will not be considered in the calculation of preferred stock’s cost because divident is not taxable in the case of preferred stock.

Now calculate the after tax cost of preferred stock:

$\text{Cost of preferred stock} = \frac{Annual \ dividend}{ Selling \ price – selling \ cost}$

$= \frac{2.65}{57 – 3.30}$

$= 4.93 \ percent$