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 21%?
A) 3.30%
B) 4.93%
C) 5.79%
D) 6.11%

Question

Quizplus · Accepted Answer

The cost of preferred stock is calculated as the dividend divided by the net proceeds from selling the stock. The net proceeds are the selling price minus any selling costs. Here, the net proceeds are $57.00 - $3.30 = $53.70. The cost of preferred stock is therefore $2.65 / $53.70 = 0.0493 or 4.93%. Taxes do not affect the cost of preferred stock because dividends are paid from after-tax income.

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