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15 June, 21:05

The preferred stock of Dolphin Pools pays an annual dividend of $6.25 a share and sells for $42 a share. The tax rate is 35 percent. What is the firm's cost of preferred stock?

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  1. 15 June, 23:27
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    kp = Do/Po

    Kp = $6.25/$42

    kp = 0.1488 = 14.88%

    Explanation: Cost of preferred stock is equal to fixed dividend paid divided by the current market price. Preference shares are not tax-deductible. Hence, tax will not be considered in our calculation.
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