Question

The well derrick has a preferred stock that pays $5.5 dividend and sells for $48 a share. this stock was originally issued at $45 per share. what is the cost of preferred stock if the firm's tax rate is 35 percent?

a. 12.80 percent
b. 12.22 percent
c. 7.45 percent
d. 11.46 percent
e. 7.94 percent

Answer 1

The cost of preferred stock for The Well Derrick is calculated as the dividend per share divided by the price per share, which is 11.46%. The firm's tax rate is not applicable to the calculation of preferred stock cost.

Step-by-step explanation:

The cost of preferred stock for The Well Derrick company, which pays a $5.5 dividend and sells for $48 a share, is calculated using the dividend yield formula for preferred stock. The formula is Cost of Preferred Stock = Dividend per Share / Price per Share. Since the tax rate does not affect the cost of preferred stock (it affects debt), we can ignore the tax rate provided in the question. Using the formula:

Cost of Preferred Stock = $5.5 / $48 = 0.114583 or 11.46%.

Therefore, the correct answer to this question is d. 11.46 percent.