Question

Billy's Goat Coats has a preferred share issue outstanding with a current price of $38.89. The firm last paid a dividend on the issue of $3.50 per share. What is the firm's cost of preferred equity if billy goats coats has a 34% marginal tax rate?

a) 5.94%
b) 8%
c) 9%
d) 10%

Answer 1

option (c) 9%

Step-by-step explanation:

Data provided in the question:

current price of outstanding shares = $38.89

Last Dividend paid = $3.50

Marginal tax rate = 34%

Now,

cost of preferred equity = Dividend ÷ Price per share

thus,

cost of preferred equity = $3.50 ÷ $38.89

or

cost of preferred equity = 0.0899

or

cost of preferred equity = 0.0899 × 100%

= 8.99% ≈ 9%

Hence,

The correct answer is option (c) 9%