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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 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.

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

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