Capital Structure

Use this info for 5 questions. DEI, Inc. (DEI), a leader in radar detection systems (RDSs) is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. DEI will use the following to fund the project. (1) 2,500 5.8% bonds with 25 years to maturity, selling for 103% of par, and makes semiannual payments. (2) 3,900 preferred stock outstanding, selling for $87 per share, and paying $6.2 dividend annually. (3) 46,900 shares outstanding, selling for $95 per share; the beta is 1.77. In addition, DEI uses market risk premium of 6.4% and the T-bill rate of 2.7%. The tax rate is 21%.

What is the cost of preferred stock?

a. 7.13%

b. 4.60%

c. 3.56%

d. 4.14%

e. 7.70%