Cost of preferred stock to a company?

Question

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

• Current price $47.00 per share

• Par value $50.00 per share

• Annual dividend $3.50 per share

If the company’s marginal corporate tax rate is 34 percent, the after-tax cost of preferred

stock is closest to:?

A. 4.62%.

B. 4.91%.

C. 7.00%.

D. 7.45%.

Answer 1

D - 7.45%

There's no tax benefit to preferred stock.

So:

3.50/47 = 7.446%