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5 February, 06:57

Burns Power is considering issuing new preferred stock with a par value of $100 and an annual dividend yield of 10%. The company's tax rate is 40%. What is Burns cost of preferred stock if the new issue is expected to net the company $90 per share?

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  1. 5 February, 07:37
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    Burn's cost of preferred stock is 11.1%

    Explanation:

    in this question, we are asked to calculate Burns cost of preferred stock given that the new issue is expected to net the company $90 per share.

    Mathematically;

    annual dividend = (10%*$100) = 10/100 * $1000 = $10

    Cost of preferred stock = annual dividend/Current price

    current price = $90 and annual dividend calculated from above is $10

    = (10/90) = 11.1% (Approx).
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