12. The preferred stock, which has a par value of $100 pays a 3% preferred stock

Question

12. The preferred stock, which has a par value of $100 pays a 3% preferred stock dividend and is now priced in the market at $75 per share. What is the cost of capital for the firm's preferred stock if there are no flotation costs to issue more stock?

a. 4.00%

b. 3.00%

c. .75%

d. Cannot be determined from the information provided

e. None of the answers provided is correct

Aurora, Inc., a manufacturer of required accessories for all princesses is in the 40% tax bracket and exhibits the following balance sheet: Cash Accounts Receivable Inventory Net Plant, Property and Equipment $ 2,000 3,000 500,000 1000.000 $1,505,000 Total Assets Accounts Payable Accrued Wages Bonds S 1,000 2,000 650,000 S 653,000 Total Debt Preferred Stock Common Stock Retained Earnings S 50,000 502,000 300,000 $ 852,000 Total Equity Total Debt and Equity $1,505,000

Explanation / Answer

Cost of preferred Stock = Dividend / Price

= 3% x 100 / 75 = 4.00%

Hence, a is correct.

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