The Cost of Capital: Cost of Preferred Stock
The cost of preferred stock, rp, used in the weighted average cost of capital equation is calculated as the preferred dividend, Dp, divided by the current price of the preferred stock, Pp. -Select-A or No tax adjustment is made when calculating rp because preferred dividends -Select-aren't or are tax deductible; so -Select-the or no tax savings are associated with preferred stock.
Quantitative Problem: Barton Industries can issue perpetual preferred stock at a price of $48 per share. The stock would pay a constant annual dividend of $3.00 per share. If the firm's marginal tax rate is 40%, what is the company's cost of preferred stock? Round your answer to 2 decimal places.
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