Since 70% of the preferred dividends received by a corporation are excluded from taxable income,the component cost of equity for a company that pays half of its earnings out as common dividends and half as preferred dividends should,theoretically,be
Cost of equity = r_s(0.30) (0.50)+ r_ps(1 - T) (0.70) (0.50).

Question

Quizplus · Accepted Answer

The preferred dividend exclusion is a benefit to the holder of the preferred,not the issuer; hence,this statement is not true.It actually is just nonsense anyway!

Since 70% of the Preferred Dividends Received by a Corporation