What is the component cost of preferred stock for a company that has $20 million in preferred stock ($75 par value) that sells for $70 a share, pays a dividend of $6.50 each year, and has an effective tax rate of 30%?

What is the component cost of preferred stock for a company that has $20 million in preferred stock ($75 par value) that sells for $70 a share, pays a dividend of $6.50 each year, and has an effective tax rate of 30%?

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter9: The Cost Of Capital

Section: Chapter Questions

Problem 7P

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Question

Definition Definition Type of stock which is granted priority over dividend distributions as compared to common stockholders. Preferred stocks also do not carry any voting rights. Notably, in a case where a company is going to be liquidated, preferred stockholders have a priority claim on the value of assets of the company as quoted in the balance sheet, as compared to the common stockholders.

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