CFA Practice Question

There are 233 practice questions for this study session.

CFA Practice Question

A company plans to issue nonconvertible, noncallable, fixed-rate perpetual preferred stock with a $6 annual dividend. The preferred stock is expected to sell for $40. If the company's marginal tax rate is 30 percent, then the cost of preferred stock is closest to ______.
A. 9.8%
B. 12.7%
C. 15%
Explanation: The cost of a perpetuity is the annual cash flow divided by the selling price. In this case, the cost of preferred stock = 6.00 / 40 = 15.0%. Because the preferred stock dividend is not tax deductible to the issuing company, there is no after-tax adjustment.

User Contributed Comments 0

You need to log in first to add your comment.