Since 70 percent of preferred dividends received by a corporation is excluded from taxable income,the component cost of equity for a company which 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_s(1 - T)(0.70)(0.50).

Question

Quizplus · Accepted Answer

The formula provided is incorrect. The cost of equity is not calculated by considering the tax exclusion on preferred dividends. The cost of equity typically involves the expected return on equity, not the tax treatment of dividends.

Since 70 Percent of Preferred Dividends Received by a Corporation