A firm is paying an annual dividend of $2.50 for its preferred stock which is selling for $50.00.There is a selling cost of $4.00.What is the after tax cost of preferred stock if the firm's tax rate is 33%?

Question

Quizplus · Accepted Answer

First, we need to calculate the net price of preferred stock by subtracting the selling cost from the market price: 
$50.00 - $4.00 = $46.00 
Then, we divide the annual dividend by the net price to get the yield: 
$2.50 / $46.00 = 0.0543 or 5.43% 
Finally, we need to account for the firm's tax rate of 33% to find the after-tax cost: 
5.43% x (1 - 0.33) = 3.63% 
Therefore, the after-tax cost of the preferred stock is 3.63%, which is closest to choice C (5.43%).

A Firm Is Paying an Annual Dividend of $2