Question

The Cost of Capital: Cost of Preferred Stock

The cost of preferred stock, rp, used in the weighted average cost of capital equation is calculated as the preferred dividend, Dp, divided by the current price of the preferred stock, Pp. -Select-A or No tax adjustment is made when calculating rp because preferred dividends -Select-aren't or are tax deductible; so -Select-the or no tax savings are associated with preferred stock.
Quantitative Problem: Barton Industries can issue perpetual preferred stock at a price of $48 per share. The stock would pay a constant annual dividend of $3.00 per share. If the firm's marginal tax rate is 40%, what is the company's cost of preferred stock? Round your answer to 2 decimal places. __%.

Answer 1

6.25%

Step-by-step explanation:

The given statement is false, as for computing the rp the tax adjustment is not considered. Moro ever, the tax saving is not associated with the preferred stock

The computation of the cost of preferred stock is shown below:

Cost of preferred stock = Annual dividend ÷ Price of preferred stock per share

= $3 ÷ $48

= 6.25%

Simply we divide the annual dividend by the price of preferred stock per share so that the correct cost of preferred stock can be computed