ABC would like to expand and have a capital structure of: 10 million preferred s

Question

ABC would like to expand and have a capital structure of: 10 million preferred stock 30 million debt 60 million common equity ABC would like to expand, in order to do so they must issue new debt with a 12% coupon rate, $1,000 par value, that have 15 year maturities. The floatation costs are 2% per bond. Preferred stock will cost ABC 11% after taxes. ABC's common stock currently sells for $22 a share and next year will pay a quarterly dividend of $0.25 per share. If the stock dividends are expected to continue to grow at a rate of 4% per year for the foreseeable future. ABC's tax rate is 35%. Find the marginal cost of preferred stock.

Explanation / Answer

marginal cost of preferred stock = cost of preferred stock * (1 - tax rate)

marginal cost of preferred stock = 11%* (1 - 35%) = 7.15%

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