Answer to Question #182623 in Other for favi

Question

a firm's preffered stock pays an annual dividend of $6, and the stock sells for $84. Flotation cost for new issuances of preferred stock are 6% of the stock value. What is the after-tax cost of preferred stock if the firm's tax rate is 32%?

Answer 1

Fixed dividend = $6 x 6% = $0.36 Net proceeds = Market price – Floatation costs = $84– (6% of $84) = 78.9

Cost of preferred stock (rps)= Fixed dividend/Net proceeds = $0.36/$78.9= 0.045%rps = 0.045%