After-Tax Cost of Preferred Stock Calculation

After-Tax Cost of Preferred Stock

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Question

The following information applies to a company's preferred stock:

Current price $105.00 per share -

Par value $100.00 per share -

Annual dividend $5.00 per share -

The company issued the preferred stock at par and incurred a 10% floatation cost. If the company's marginal corporate tax rate is 40%, what is the after-tax cost of preferred stock?

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A. B. C. D. E. F.

E

The cost of preferred stock is calculated as the preferred stock dividend divided by the net issuing price. The dividend for this preferred stock is $5.00, and the net issuing price was $90.00. Thus the cost of preferred stock is 5 divided by 90 or 5.6%. There are no tax savings associated with the use of preferred stock, therefore no tax adjustments are made when calculating the cost.

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