The 7.5 percent preferred stock of Tanners Floors is selling for $57 a share. What is the firm's cost of preferred stock if the tax rate is 35 percent and the par value per share is $100?

Question

Quizplus · Accepted Answer

The annual preferred dividend is:
$100 × 7.5% = $7.50 per share

The cost of preferred stock is calculated as follows:
($7.50 ÷ $57) × 100 = 0.1316 or 13.16%

Since the tax rate is 35%, the cost of preferred stock will be:
0.1316 × (1 - 0.35) = 0.08554 or 8.554%

Therefore, the cost of preferred stock for Tanners Floors is 13.16%.

The 75 Percent Preferred Stock of Tanners Floors Is Selling for for $57