Question

Grill works has 7 percent preferred stock outstanding that is currently selling for $49 a share. the market rate of return is 14 percent and the firm's tax rate is 37 percent. what is the firm's cost of preferred stock?

a. 14.29 percent
b. 13.77 percent
c. 13.29 percent
d. 14.54 percent
d. 13.67 percent

Answer 1

The cost of preferred stock for Grill Works is 14.29%.

Step-by-step explanation:

The cost of preferred stock can be calculated using the formula: Cost of Preferred Stock = Dividend per share / Price per share

First, we need to calculate the dividend per share. The dividend per share is equal to the preferred stock dividend rate times the par value per share. Here, the preferred stock dividend rate is 7% and the par value per share is not given. Let's assume the par value per share is $100. So, the dividend per share would be 7% * $100 = $7.

Next, we can calculate the price per share by dividing the current market price by the par value. Here, the market price is $49 and the assumed par value is $100. So, the price per share would be $49 / $100 = 0.49.

Finally, we can calculate the cost of preferred stock using the formula: Cost of Preferred Stock = $7 / 0.49 = 14.29%.