A firm is paying an annual dividend of $2.65 for its preferred stock that is selling for $57.00. There is a selling cost of $3.30. What is the after-tax cost of preferred stock if the firm's tax rate is 33%?

Question

Quizplus · Accepted Answer

The after-tax cost of preferred stock can be calculated using the formula:

After-tax cost of preferred stock = (annual dividend / net proceeds) x (1 - tax rate)

First, we need to calculate the net proceeds, which is the selling price minus the selling cost:

Net proceeds = selling price - selling cost
Net proceeds = $57.00 - $3.30
Net proceeds = $53.70

Now we can plug in the values and solve for the after-tax cost:

After-tax cost of preferred stock = ($2.65 / $53.70) x (1 - 0.33)
After-tax cost of preferred stock = 0.0493 or 4.93%

Therefore, the best choice is B.

A Firm Is Paying an Annual Dividend of $2