The required return of a preferred stockholder,rps,is higher than the cost of preferred stock for the corporation because stockholders must pay federal taxes on their dividend income.

Question

Quizplus · Accepted Answer

The required return of a preferred stockholder, rps, is actually lower than the cost of preferred stock for the corporation as preferred stock dividends are tax-deductible for the corporation. Therefore, preferred stockholders do not have to pay federal taxes on their dividend income, making the cost of preferred stock lower than rps.

The Required Return of a Preferred Stockholder,rps,is Higher Than the Cost