SW Inc.'s preferred stock, which pays a $5 dividend each year, currently sells for $62.50. The company's marginal tax rate is 40 percent. What is the cost of preferred stock, rps, that should be included in the computation of the SW Inc.'s weighted average cost of capital (WACC)?
A) 10.00 percent
B) 4.00 percent
C) 5.00 percent
D) 8.00 percent
E) 2.00 percent

Question

Quizplus · Accepted Answer

The cost of preferred stock is calculated as the dividend divided by the current price of the stock. Therefore, rps = $5 / $62.50 = 0.08 or 8.00 percent. The tax rate does not affect the cost of preferred stock.

SW Inc'S Preferred Stock, Which Pays a $5 Dividend Each Year