What is the after-tax cost of preferred stock if its price is $25 per share and

Question

What is the after-tax cost of preferred stock if its price is $25 per share and it pays a $1 per share dividend? Assume the firm's marginal tax rate is 25% and there are no flotation costs. a.5% b.9% c.3% d.4% e.1%

Blackwater Adventures has a bond issue outstanding that matures in sixteen years. The bonds pay interest semi-annually. Currently, the bonds are quoted at 103 percent of face value and carry a 9 percent coupon. The firm's tax rate is 34 percent. What is the firm's after-tax cost of debt?

5.19 percent

5.71 percent

7.86 percent

8.65 percent

11.41 percent

a.

5.19 percent

b.

5.71 percent

c.

7.86 percent

d.

8.65 percent

e.

11.41 percent

Explanation / Answer

After-tax cost of preferred stock = 1/25 * 100 = 4%

Firm's after-tax cost of debt = 4.3*2 = 8.6%

Answer: 8.65%

Time Cash flow DF @3% Semi-annually PV DF @4% Semi-annually PV 1-32 45 20.389 917 17.874 804 32 1000 0.388 388 0.285 285 1306 1089 Price 1030 Change in NPV for change in DF of 1% 216 IRR 4.3%

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