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4 March, 23:31

A firm's preferred stock pays an annual dividend of $2, and the stock sells for $65. Flotation costs for new issuances of preferred stock are 5% of the stock value. What is the after-tax cost of preferred stock if the firm's tax rate is 30%

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  1. 4 March, 23:53
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    2.27%

    Explanation:

    We have the following formula:

    Cost of preferred stock = [ D / Po x (1-F) ] x 0.7

    D: Annual preferred dividend ($2)

    Po: Current stock price ($65)

    F: Flotation cost (5%)

    Cost of preferred stock = [ 2 / 65 x (1-0.05) ] x 0.7 = 2.27%
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