Answered: Barton Industries can issue perpetual…

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter12: Valuation: Cash-flow Based Approaches

Section: Chapter Questions

Problem 1FIC

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Determining the Cost of Capital: Cost of Preferred Stock

The cost of preferred stock, r_ps, used in the weighted average cost of capital equation is calculated as the preferred dividend, D_ps, divided by the current price of the preferred stock, P_ps. tax adjustment is made when calculating r_ps because preferred dividends tax deductible; so tax savings are associated with preferred stock.

Quantitative Problem: Barton Industries can issue perpetual preferred stock at a price of $58 per share. The stock would pay a constant annual dividend of $3.40 per share. If the firm's marginal tax rate is 40%, what is the company's cost of preferred stock? Round your answer to 2 decimal places.
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