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30 October, 14:09

The 7.5 percent preferred stock of Home Town Brews is selling for $43 a share. What is the firm's cost of preferred stock if the tax rate is 34 percent and the par value per share is $100?

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  1. 30 October, 14:32
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    The firm's cost of preferred stock is 17.44%

    Explanation:

    For computing the cost of preferred stock, first, we have to calculate the dividend per share. The formula of dividend per share is shown below:

    Dividend per share = Preferred stock percentage * par value per share

    = 7.5 % * $100

    =$7.5 per share

    Now we can easily compute the cost of preferred stock. The formula is shown below:

    = Dividend per share : Price of preferred stock

    = $7.5 : $43

    = 17.44%

    The tax rate should be ignored because the tax rate is used for debt calculation, not for preferred stock.

    Hence, the firm's cost of preferred stock is 17.44%
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