Question

The company finances its operations and growth opportunities, using common equity, debt, and preferred equity. It issued a 20 year, 6 percent oupon rate of 6%) bonds 5 years ago. The bond is currently selling for $1080, and its face value is $1000. As for the preferred stock, the price per share is $89, and it pays $3.85 dividend per share annually. As for the common equity, the beta is 1.24. The total debt ratio is 0.4, the ratio of the market value of preferred equity divided by the value of total assets is 0.05. Assume the risk-free rate of 2%, the corporate tax rate of 30%, and the market risk premium of 7%. What comes closest to the cost of preferred equity?

a. 7%.
b. 6%
c. 4%
d. 7%
e. 5%
f. 3%

Answer 1

correct option is c. 4%

Step-by-step explanation:

given data

bond selling = $1080

face value = $1000

Annual dividend = $3.85

price = $89

beta = 1.24

total debt ratio = 0.4

solution

we get here cost of preferred equity that is express as

cost of preferred equity = Annual dividend ÷ Price ..............1

put here value and we will get

cost of preferred equity =
`(3.85)/(89)`

cost of preferred equity = 4.33%

so closest correct option is c. 4%