Question

Medco Corporation can sell preferred stock for $88 with an estimated flotation cost of $5. It is anticipated the preferred stock will pay $7 per share in dividends. a. Compute the cost of preferred stock for Medco Corp. (Input your answer as a percent rounded to 2 decimal places.) b. Do we need to make a tax adjustment for the issuing firm

Answer 1

Answer:

a. 8.43%

b. No

Explanation:

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

= (Annual dividend) ÷ (Price of preferred stock per share  - flotation cost)

= $7 ÷ ($88  - $5)

= $7 ÷ $83

= 8.43%

Simply we divide the annual dividend by the price of preferred stock per share so that the correct cost of preferred stock can be computed

b. And the tax adjustment is not required for preferred stock