Cost of Preferred Stock

The cost of preferred stock, r_p, used in the weighted average cost of capital equation is calculated as the preferred dividend, D_p, divided by the current price of the preferred stock, P_p. -Select-ANoItem 1 tax adjustment is made when calculating r_p because preferred dividends -Select-aren'tareItem 2 tax deductible; so -Select-thenoItem 3 tax savings are associated with preferred stock.

Quantitative Problem: Barton Industries can issue perpetual preferred stock at a price of $56 per share. The stock would pay a constant annual dividend of $3.71 per share. If the firm's marginal tax rate is 25%, what is the company's cost of preferred stock? Round your answer to two decimal places.

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