Coral Inc.'s preferred stock currently sells for $90 a share and pays a dividend of $10 per share. However, the firm will net only $80 per share if it issues new preferred stock. What is Coral's cost of preferred stock? Coral's marginal tax rate is 35 percent.

Question

Quizplus · Accepted Answer

The cost of preferred stock is calculated as the dividend per share divided by the net proceeds per share from selling the stock. Here, it is $10/$80 = 0.125 or 12.50%. Taxes do not affect the cost of preferred stock.

Coral Inc's Preferred Stock Currently Sells for $90 a Share and and Pays