Spencer Bioengineering's preferred stock has a par value of $100 and pays a dividend of $4.50. The current price of Spencer's preferred is $75. Spencer's tax rate is 34%. The before tax and after tax cost of preferred equity to Spencer is

Question

Quizplus · Accepted Answer

The before-tax cost of preferred equity is calculated as the dividend divided by the current price, which is $4.50 / $75 = 6.00%. Since dividends on preferred stock are paid from after-tax income, the after-tax cost of preferred equity is the same as the before-tax cost, which is 6.00%.

Spencer Bioengineering's Preferred Stock Has a Par Value of $100