1215

The cost of preferred stock is equal to the preferred stock dividend:

A) divided by the market price.

B) divided by its par value.

C) multiplied by the market price.

---

The cost of preferred stock, k_ps, is D_ps ÷ price.

1215

A $100 par, 8% preferred stock is currently selling for $80. What is the cost of preferred equity?

A) 10.8%.

B) 8.0%.

C) 10.0%.

---

k_ps = $8 / $80 = 10%

1215

The following information applies to a corporation:

• The company has $200 million of equity and $100 million of debt.
• The company recently issued bonds at 9%.
• The corporate tax rate is 30%.
• The company's beta is 1.125.

If the risk-free rate is 6% and the expected return on the market portfolio is 14%, the company’s after-tax weighted average cost of capital is closest to:

A) 12.1%.

B) 10.5%.

C) 11.2%.

---

k_s = RFR + β(R_m ? RFR)
= 6% + 1.125(14% ? 6%) = 15%

WACC = [D/(D + E)] × k_d(1 ? t) + [E/(D + E)] × k_s
= (100/300)(9%)(1 ? 0.3) + (200/300)(15%) = 12.1%