Question

The 7.5 percent preferred stock of Home Town Brews is selling for $43 a share. What is the firm's cost of preferred stock if the tax rate is 34 percent and the par value per share is $100?

Answer 1

The firm's cost of preferred stock is 17.44%

Step-by-step explanation:

For computing the cost of preferred stock, first, we have to calculate the dividend per share. The formula of dividend per share is shown below:

Dividend per share = Preferred stock percentage × par value per share

= 7.5 % × $100

=$7.5 per share

Now we can easily compute the cost of preferred stock. The formula is shown below:

= Dividend per share ÷ Price of preferred stock

= $7.5 ÷ $43

= 17.44%

The tax rate should be ignored because the tax rate is used for debt calculation , not for preferred stock.

Hence, the firm's cost of preferred stock is 17.44%