Question

The 7.5 percent preferred stock of Rock Bottom Floors is selling for $60 a share. What is the firm's cost of preferred stock if the tax rate is 35 percent and the par value per share is $100?

a) 14.14 percent
b) 7.50 percent
c) 12.50 percent
d) 13.79 percent
e) 8.13 percent

Answer 1

The answer is C.

Step-by-step explanation:

Vo = D/kp

Where Vo is the current market price of preferred stock

D is the dividend

And Kp is the cost of preferred stock.

Let's rearrange the formula to get Kp,;

Kp = D/Vo

D = $7.5(7.5 percent of $100)

Vo = $60

Therefore, we have;

7.5/60

=0.125

To express it as a percentage

0.125 x 100 percent

12.5 percent