Question: St. Joe Trucking has sold an issue of $6 cumulative preferred stock to the public at a price of $60 per share. After issuance costs, St. Joe netted $57 per share. The company has a marginal tax rate of 40 percent.
Q1. Calculate the after-tax cost of this preferred stock offering assuming that this stock is perpetuity.
Q2. If the stock is callable in five years at $66 per share and investors expect it to be called at that time, what is the after-tax cost of this preferred stock offering? (Compute to the nearest whole percent.)