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28 January, 10:13

Billy's Goat Coats has a preferred share issue outstanding with a current price of $38.89. The firm last paid a dividend on the issue of $3.50 per share. What is the firm's cost of preferred equity if billy goats coats has a 34% marginal tax rate?

a) 5.94%

b) 8%

c) 9%

d) 10%

Answers (1)
  1. B
    28 January, 13:36
    0
    option (c) 9%

    Explanation:

    Data provided in the question:

    current price of outstanding shares = $38.89

    Last Dividend paid = $3.50

    Marginal tax rate = 34%

    Now,

    cost of preferred equity = Dividend : Price per share

    thus,

    cost of preferred equity = $3.50 : $38.89

    or

    cost of preferred equity = 0.0899

    or

    cost of preferred equity = 0.0899 * 100%

    = 8.99% ≈ 9%

    Hence,

    The correct answer is option (c) 9%
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