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