The following information applies to a company's preferred stock:
Current price $48.00 per share -
Par value $50.00 per share -
Annual dividend $3.50 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 34%, what is the after-tax cost of preferred stock at the time of issue?
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A. B. C. D. E. F.D
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 $3.50, and the net issuing price was $45.00. Thus the cost of preferred stock is 3.5 divided by 45 or 7.8%. There are no tax savings associated with the use of preferred stock, therefore no tax adjustments are made when calculating the cost.