Jensen\'s Travel Agency has 10 percent preferred stock outstanding that is curre

Question

Jensen's Travel Agency has 10 percent preferred stock outstanding that is currently selling for $36 a share. The market rate of return is 9 percent and the firm's tax rate is 34 percent. What is Jensen's cost of preferred stock?

27.78 percent

9.44 percent

13.60 percent

25.00 percent

6.60 percent

Jensen's Travel Agency has 10 percent preferred stock outstanding that is currently selling for $36 a share. The market rate of return is 9 percent and the firm's tax rate is 34 percent. What is Jensen's cost of preferred stock?

Explanation / Answer

Preferred stocks are issued with a fixed par value, and they pay dividends to shareholders based on a percentage of that value at a fixed rate. The following formula can be used to calculate the cost of preferred stock:

Rps = Dps/Pnet

Where:

Rps = cost of preferred stock

Dps = preferred dividends

Pnet = net issuing price

Therefore,cost of preferred stock = $ 10 /$ 36

= 27.78 %

Note : It has been assumed that the face value of the stock is $100.

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