A firm's preferred stock pays an annual dividend of $2, and the stock sells for $65. Flotation costs for new issuances of preferred stock are 5% of the stock value. What is the after-tax cost of preferred stock if the firm's tax rate is 30%

2.27%

Explanation:

We have the following formula:

Cost of preferred stock =  [ D / Po x (1-F) ] x 0.7

D: Annual preferred dividend ($2)

Po: Current stock price ($65)

F: Flotation cost (5%)

Cost of preferred stock =[ 2 / 65 x (1-0.05) ] x 0.7 = 2.27%

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