preferred stock current, company, corporate

kim226

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%

kmf229

When would tax be used on the preferred stock?

The tax would be dependant on each individual owner?

spartanag07

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.