Answer (D) is correct . The cost of capital for new preferred stock is equal to the dividend on the stock divided by the net issue proceeds [$10 ÷ ($101 – $5) = 10.4%]. Because dividends on preferred stock are not deductible for tax purposes, the income tax rate is irrelevant.
Answer (A) is incorrect because This figure results from improperly multiplying the dividends by the tax rate.
Answer (B) is incorrect because This figure results from improperly multiplying the dividends by the tax rate.
Answer (C) is incorrect because This figure results from improperly basing the calculation on par value funds received.
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