Final answer:
The cost of preferred stock to Snowmobiles, Inc. is calculated by dividing the annual dividend by the current market price per share, leading to the correct answer of 14.48 percent.
Step-by-step explanation:
The question asks us to calculate the cost of preferred stock for Snowmobiles, Inc., which is selling for $55.25 per share and pays an 8 percent dividend. The cost of preferred stock is calculated by taking the annual preferred dividend and dividing it by the current price per share. This can be expressed by the formula:
Cost of Preferred Stock = Annual Dividend / Current Market Price per Share
In this case, the annual dividend would be 8 percent of the par value. Since the par value is typically $100 (unless stated otherwise), the dividend is $8 per share. Therefore, the cost of preferred stock to the firm is calculated as:
$8 / $55.25 = 0.1448 or 14.48%
The correct answer is (c) 14.48 percent.
It is important to understand this concept as it is pivotal for a company in terms of determining the expense involved in raising funds through preferred stock issuance. This expense impacts a company's decision-making with regard to financing strategies and capital structure management.