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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?

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thaovtp1407

Answer:

The company's cost of preferred stock is 8%

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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