Diggin Tools plans to issue new preferred stock, which has a market value of $85 per share. Holders of the stock will receive an annual dividend equal to $9.35. The flotation costs associated with the new issue were 6 percent and Diggin's marginal tax rate is 30 percent. What Diggin's component cost of preferred stock, rps?

11.70%

Explanation:

The computation of the cost of preferred stock is shown below : -

The cost of preferred stock = {Annual Dividend} : {Price of preferred stock per share * (1 - Flotation cost) }

= {$9.35} : {$85 * (1 - 0.06) }

= {$9.35} : {$85 * 0.94}

= {$9.35} : {$79.9}

= 11.70%

We ignored the marginal tax rate i. e. given in the question.