Purchase Solution

# Cost of preferred stock

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. St. Joe Trucking has sold an issue of \$6 cumulative preferred stock to the public at a price of \$60 per share. After issuance costs, St. Joe netted \$57 per share. The company has a marginal tax rate of 40 percent.

a. Calculate the after-tax cost of this preferred stock offering assuming that this stock is perpetuity.

b. If the stock is callable in five years at \$66 per share and investors expect it to be called at that time, what is the after-tax cost of this preferred stock offering? (Compute to the nearest whole percent.)

##### Solution Summary

The solution explains how to calculate the cost of preferred stock

##### Solution Preview

a. For a perpetuity the cost is given as annual dividend/initial price
The annual dividend is \$6
The amount realized from the sale is \$57
The cost of preferred stock = 6/57 = 10.53%
Since dividends are ...

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