Question

A company’s perpetual preferred stock has a par value of $15 million and pays a dividend rate of 7.5% per year. The company’s tax rate is 42%. If the preferred stock’s market value is $14.1 million, what is the company’s annual cost of preferred stock financing? Question 2 options: 1) 7.98% 2) 8.25% 3) 6.89% 4) 7.64% 5) 7.23%

Answer 1

1) 7.98%

Step-by-step explanation:

The solution to the company’s annual cost of preferred stock financing is shown below:-

The Annual cost of preferred stock financing = Preferred stock par value × Dividend rate per year ÷ Market value

= $15 million × (0.075) ÷ $14.1 million

= 7.98%

Therefore for computing the Annual cost of preferred stock financing we simply applied the above formula.