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 = rs(0.30)(0.50)+ rps(1 - T)(0.70)(0.50).

Question

Quizplus · Accepted Answer

the preferred dividend exclusion is a benefit to the holder of the preferred, not the issuer; hence, this statement is not true.It actually is just nonsense anyway!

Since 70% of the Preferred Dividends Received by a Corporation