current price: 47 par value: 50 annual dividend: 3.5 if the company’s marginal corporate tax rate is 34 percent, the after tax cost of preferred stock is closest to: a. 4.62% b. 4.91% c. 7.00% d. 7.45%
cost of preferred stock is divident over price. tax is used for cost of debt and it is irrelevant in this case.
When would tax be used on the preferred stock? The tax would be dependant on each individual owner?
answer should be D, im pretty sure. 3.5/47 = 7.45% tax only comes into play with debt as there are tax savings to be had on the interest you pay. remember that interest is a part of the income statement, more specifically, income from continuing operations. Dividends do not show up on the income statement, they are a part of SE. You could come into a bit of a bind if the question mentions that the preferred stock must be bought back at a specific point in time. In that case, it may need to be treated as debt.