Answer (D) is correct . The component cost of preferred stock is the dividend yield, i.e., the cash dividend divided by the market price of the stock ($0.75/ $5.00 = 15%). Preferred dividends are not deductible for tax purposes.
Answer (A) is incorrect because Using the complement of the tax rate to reduce the effective cost results in 5.25%.
Answer (B) is incorrect because This percentage reduces the cost by the tax rate, which is not appropriate since preferred dividends are not deductible for tax purposes.
Answer (C) is incorrect because This percentage assumes a 30% tax rate and deductibility of dividends.
Answer (B) is incorrect because This percentage reduces the cost by the tax rate, which is not appropriate since preferred dividends are not deductible for tax purposes.
Answer (C) is incorrect because This percentage assumes a 30% tax rate and deductibility of dividends.
