Final answer:
The statement regarding the calculation of perpetual preferred stock cost without the need for tax adjustment, due to dividends not being tax-deductible, is true. This calculation is a part of determining a company's weighted average cost of capital (WACC).
Step-by-step explanation:
The statement 'The cost of perpetual preferred stock is found as the preferred's annual dividend divided by the market price of the preferred stock. No adjustment is needed for taxes because preferred dividends, unlike interest on debt, are not deductible by the issuing firm' is true.
Perpetual preferred stock represents a type of equity that pays a fixed dividend to investors indefinitely, and unlike debt, the dividends paid on this equity are not tax-deductible for the corporation. The cost of perpetual preferred stock is indeed calculated using the formula of the annual dividend payment divided by the market price of the stock. No tax adjustments are required in this calculation, making it straightforward compared to debt financing, where tax deductibility of interest must be taken into account.
Understanding the cost of preferred stock is crucial in the context of corporate finance, as it is part of a company's weighted average cost of capital (WACC). This cost influences decisions on various financial strategies, project evaluations, and investment opportunities. It's important because it affects how the firm is viewed by investors and affects its market value.