A firm has issued 10 percent preferred stock, which sold for $100 per share par value. The cost ofissuing and selling the stock was $2 per share. The firm's marginal tax rate is 40 percent. The costof the preferred stock is

Question

Quizplus · Accepted Answer

The cost of preferred stock is the dividend rate divided by the net proceeds after flotation costs. 
Dividend rate = 10% of $100 = $10
Net proceeds = $100 - $2 = $98
Cost of preferred stock = ($10 / $98) = 10.2%

A Firm Has Issued 10 Percent Preferred Stock, Which Sold