Question

COST OF PREFERRED STOCK

15. A preferred stock paying a 7.5% dividend on par value ($100 Par) can be sold to net $65 per share. Tax rate is 34%. What is the cost of preferred stock to the firm?

16. Compute the cost of internal equity (or retained earnings) when the current market price of the common stock is $32. The expected dividend this forthcoming year is $1.75 increasing thereafter at a 6.5% annual rate.    

Answer 1

15)

Cost of Prefered Stock

11.54%

Working;

a. Dividend on preferred stock

=

Par Value x Dividend rate

=

$        100

x

7.50%

=

$       7.50

b. Cost of Preferred Stock

=

Dividend on preferred stock

/

Current selling price

=

$       7.50

/

$    65.00

=

11.54%

Note:

Tax does not affect dividend.

16)

Cost of Internal Equity

11.97%

Working:

Cost of Internal Equity

=

(D1/P0)+g

Where,

=

(1.75/32.00)+0.065

D1

$       1.75

=

11.97%

P0

$    32.00

g

6.50%