Question

Grill Works and More has 7 percent preferred stock outstanding that is currently selling for $55 a share. The market rate of return is 10 percent and the firm's tax rate is 33 percent. What is the firm's cost of preferred stock?

Answer 1

R(pref) = 12.73%

Step-by-step explanation:

Hi, there is several things here that will only get you confuse, first, there is no use for the market rate of return, we need to find how much issuing this preferred stocks costs to the company.

Second, preferred stocks are not tax deductable therefore there is no point into mentioning the tax-rate of the company.

i think it should be relevant for this type of exercises to mention that a "7% preferred stock outstanding" means that the company is paying 7% of $100 as a fixed payment for every preferred stock.

For all of the above, the answer to this question can be found by using the following formula.

`Rp=(Fixed payment)/(Price)x100`

`Rp=((0.07x100))/(55)x100=12.73%`

Best of luck.