market rate (Mr)=14%
cost in market (M)= 14% of $100
=$14
selling price of pref. stock (Sp) = $28
after tax cost of pref. stock = (M/Sp)*100%
=($14/$28)*100%
=50.00%
note: dividend is not tax deductible item. so, tax benefit( i.e. (1-Tax) which make cost of pref. stock low) can not be taken.
8% rate is only for existing pref. stock. if company issue new pref. stock, market rate is effective (applied)
because investors want 14% return and make investment of only $28( since existing pref. stock currently selling at $28). hence, cost of pref. stock goes high.
Jensen's Travel Agency has 8 percent preferred stock outstanding that is currently selling for $28 a share. The market rate of return is 14 percent and the firm's tax rate is 34 percent. What is Jensen's cost of preferred stock?
9.71 percent
28.57 percent
5.44 percent
50.00 percent
5.28 percent
I don't even know where to begin with this question. If someone can offer a solution to this problem, including relevant formulas, I would really appreciate it.
