Billy's Goat Coats has a preferred share issue outstanding with a current price of $38.89. The firm last paid a dividend on the issue of $3.50 per share. What is the firm's cost of preferred equity if billy goats coats has a 34% marginal tax rate?

a) 5.94%

b) 8%

c) 9%

d) 10%

option (c) 9%

Explanation:

Data provided in the question:

current price of outstanding shares = $38.89

Last Dividend paid = $3.50

Marginal tax rate = 34%

Now,

cost of preferred equity = Dividend : Price per share

thus,

cost of preferred equity = $3.50 : $38.89

or

cost of preferred equity = 0.0899

or

cost of preferred equity = 0.0899 * 100%

= 8.99% ≈ 9%

Hence,

The correct answer is option (c) 9%