EXAMPLE

Find the after$-$tax cost of debt for a company that pays $8\%$ interest on debt and is subject to a

$25\%$ marginal tax rate.

$r_d(1-T)=$

COST OF PREFERRED STOCK, $r_p($Section $10-4)$

The cost of preferred stock is simply the preferred dividend divided by the price the

company will receive if it issues new preferred stock. No tax adjustment is necessary, as

preferred dividends are not tax deductible.

EXAMPLE

What is the cost of preferred stock for a company that pays a preferred dividend of $$10$ per

share if the company could sell new preferred for $$97\mathrm{.}50$ per share?