Calculate the after-tax cost of preferred stock for Ohio Valley Power Company, which is planning to sell $100 million of $3.25 cumulative preferred stock to the public at a price of $25 per share. Flotation costs are $1.00 per share. Ohio Valley has a marginal income tax rate of 40%.

Question

Quizplus · Accepted Answer

The after-tax cost of preferred stock is calculated as the dividend divided by the net proceeds per share. The dividend is $3.25, and the net proceeds per share are $25 - $1 = $24. The tax rate does not affect preferred stock, so the cost is $3.25 / $24 = 13.54%.

Calculate the After-Tax Cost of Preferred Stock for Ohio Valley