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    Cost of Preferred Stock

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    .current selling price of preferred stock $40
    .current dividend @ share $4
    .to issue new preferred stock, flotation costs are 5% of selling price
    .company's marginal tax rate 30%

    What is relevant cost of new preferred stock?

    $4/($40-5%) = 10.53%.
    Do I need to include the marginal tax rate in the relevant cost?

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    Solution Preview

    You do not need to include the marginal tax rate in the computation because ...

    Solution Summary

    Given a set of facts, this solution illustrates how to determine which of those facts is relevant to computing the cost of preferred stock and how to compute that cost.