Question

Diggin Tools plans to issue new preferred stock, which has a market value of $85 per share. Holders of the stock will receive an annual dividend equal to $9.35. The flotation costs associated with the new issue were 6 percent and Diggin's marginal tax rate is 30 percent. What Diggin's component cost of preferred stock, rps?

Answer 1

11.70%

Step-by-step explanation:

The computation of the cost of preferred stock is shown below :-

The cost of preferred stock = {Annual Dividend} ÷ {Price of preferred stock per share × (1 - Flotation cost)}

= {$9.35} ÷ {$85 × (1 - 0.06)}

= {$9.35} ÷ {$85 × 0.94}

= {$9.35} ÷ {$79.9}

= 11.70%

We ignored the marginal tax rate i.e. given in the question.