Since 70% of the preferred dividends received by a corporation are excluded from taxable income,the component cost of equity for a company that pays half of its earnings out as common dividends and half as preferred dividends should,theoretically,be
Cost of equity = r_s(0.30)(0.50)+ r_ps(1 − T)(0.70)(0.50).

Question

Quizplus · Accepted Answer

The formula provided is incorrect for calculating the cost of equity. The cost of equity typically considers the return required by equity investors, not the tax treatment of dividends. The tax exclusion of preferred dividends affects the after-tax cost of preferred stock, not the cost of equity.

Since 70% of the Preferred Dividends Received by a Corporation