Question

Barton Industries can issue perpetual preferred stock at a price of $56 per share. The stock would pay a constant annual dividend of $3.72 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 calculated by dividing the constant annual dividend by the price per share, resulting in 6.64% for Barton Industries.

Step-by-step explanation:

To calculate the cost of preferred stock for Barton Industries, we use the following formula: Cost of Preferred Stock = Annual Dividend Per Share / Price Per Share. Given the annual dividend is $3.72 per share and the stock price is $56 per share, the calculation is $3.72 / $56. Despite the firm's marginal tax rate being 25%, taxes do not usually affect the cost of preferred stock as dividends on preferred stocks are not tax-deductible.

Therefore, the cost of preferred stock for Barton Industries is 0.0664, or 6.64% when expressed as a percentage.

Answer 2

The company's cost of preferred stock is 8%

Step-by-step explanation:

Given that:

• Annual dividend : $3.72 per share
• Tax rate :25% = 0.25
• Preferred stock price: $56 per share

To find the company's cost of preferred stock, we use this formula:

Annual dividend/price of preferred stock*(1-tax rate)

= $3.72 / $56 (1-0.25)

= 0.08

<=> 0.08*100% = 8%

So the company's cost of preferred stock is 8%

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