After-Tax Cost?

Question

Calculate the after-tax cost of preferred stock for Bozeman-Western Airlines, Inc., which is planning to tell $10 million of $4.50 cumulative preferred stock to the public at a price of $48 a share. The company has a marginal tax rate of 40 percent.

Answer 1

Unless I am mistaken, which I frequently am, the tax rate does not enter into the calculation since dividends are paid with after tax dollars unlike interest expense which is paid with before tax dollars.  However some preferred stock is actually considered a debt instrument rather than an equity instrument.  I have to assume the preferred stock is not classified as a debt instrument.

Unfortunately, $48 a share does not divide equally into $10,000,000.  I have to assume that they actually issued 208,333 shares or $9,999,984 worth.

208,333 x 4.50 = $937,498.50

I think that is the answer.