Question

A company has 200,000 shares of 8% preferred stock with $10 par in its capital structure. The preferred stock currently sells for $15. The company has a tax rate of 40%. Ignore flotation costs. The cost of preferred stock used in WACC will be:

Answer 1

the cost of preferred stock is 5.33%

Step-by-step explanation:

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

The cost of preferred stock is

= (Par value × dividend rate) ÷ (Share price)

= ($10 × 8%) ÷ ($15)

= ($0.8) ÷ ($15)

= 5.33%

Hence, the cost of preferred stock is 5.33%

The same is to be considered

We simply applied the above formula so that the correct cost could come