Question

Barton Industries can issue perpetual preferred stock at a price of $50 per share. The stock would pay a constant annual dividend of $3.78 per share. If the firm's marginal tax rate is 25%, what is the company's cost of preferred stock

Answer 1

The company's cost of preferred stock is 7.56%

Step-by-step explanation:

The company's cost of preferred stock is the return that the company pays to owners of deferred stock, which is expressed dividend divided the price of the preferred stock

Cost of preferred stock=$3.78/$50

cost of preferred stock=7.56%

The marginal rate of tax is not considered since preferred stocks are not tax deductible unlike bonds whose cost can be computed pre-tax(before tax is considered ) and after-tax (when has been factored in) as bonds are tax deductible.

The implication of tax deductibility is that such interest on bonds is deducted from revenue before tax is computed, which lowers tax payable.