The preferred stock of Pollard's Pools pays an annual dividend of $5.50 a share and sells for $42 a share. The tax rate is 34 percent. What is the firm's cost of preferred stock?

Question

Quizplus · Accepted Answer

Cost of preferred stock can be calculated using the following formula: 
Cost of preferred stock = Annual dividend / Net issuing price 
Here, the annual dividend is $5.50, and the net issuing price is $42 (since we have to pay 34% tax on the dividend).
So, Cost of preferred stock = $5.50 / ($42 * (1-0.34)) = 0.1309 or 13.10% (rounded to two decimal places). 
Hence, the answer is B.

The Preferred Stock of Pollard's Pools Pays an Annual Dividend