4. St. Joe Trucking has sold an issue of $6 cumulative preferred stock

QUESTION

4. St. Joe Trucking has sold an issue of $6 cumulative preferred stock to the common public at a price of $60 per share. After issuance costs, St. Joe netted $57 per share. The company has a marginal tax rate of 40 percent.a. Calculate the after-tax cost of this preferred stock offering assuming tha
Dividend per cumulative preferred stock = $6 Marginal tax rate = 40% (a) Calculate after-tax cost of this preferred stock offering assuming that this stock is perpetuity: Preferred Dividend per share = $6 Marginal tax rate = 40% Cost of Preferred Stock = [Preferred Dividend / Stock value per share] Cost of Preferred Stock (R P ) = [D / P 0 ] D = Fixed Dividend P 0 = Current price per share of the preferred stock Cost of Preferred Stock = [$6 / $57] Cost of Preferred Stock = 0.10526 (or0 10.52% After-tax Cost of Preferred Stock = 10.52% (1-40%) After-tax Cost of Preferred Stock = 0.1052 (0.60) After-tax Cost of Preferred Stock =0.06312 (or) 6.312% After-tax Cost of Preferred Stock = 6.312% (b) If the Stock is callable in five years at $66 per share and investors expect it to be called at the time,

t is the after-tax cost of this preferred stock offering? Preferred stock callable in five years at $66 per share Cost of Preferred Stock (R P ) = [D / P 0 ] D = Fixed Dividend P 0 = Current price per share of the preferred stock Cost of Preferred Stock = [$6 / $66] Cost of Preferred Stock = 0.0909 (or) 9.09% Cost of Preferred Stock = 9.09% After-tax Cost of Preferred Stock = 9.09% (1-40%) After-tax Cost of Preferred Stock = 0.0909 (0.60) After-tax Cost of Preferred Stock =0.05454 (or) 5.454% After-tax Cost of Preferred Stock = 5.454%

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