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matrenka [14]
2 years ago
14

A company has preferred stock with a current market price of $18 per share. The preferred stock pays an annual dividend of 4% ba

sed on a par value of $100. Flotation costs associated with the sale of preferred stock equal $1.50 per share. The company's marginal tax rate is 40%. Therefore, the cost of preferred stock is
Business
1 answer:
scZoUnD [109]2 years ago
3 0

Answer:

Answer:

Dividend (D) = 4% x $100 = $4

Current market price (Po) = $18

Flotation cost (FC) = $1.50

Tax rate (T) = 40% = 0.40

Kp =   <u> D </u>

       Po-FC

Kp =   <u>  $4 </u>

        $18-$1.50

Kp = <u>$4 </u>

      $16.5

Kp = 0.24 = 24%

Explanation:

Cost of preferred stock equals dividend divided by the difference between current market price and flotation cost. Cost of preferred stock is not tax deductible.

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a.

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b.

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