Question

Kresler Autos has preferred shares outstanding that pay annual dividends of $13, and the current price of the shares is $89. What is the after-tax cost of new preferred shares for Kresler if the flotation (issuance) costs for preferred are 5 percent? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)

Answer 1

After-tax cost of new preferred shares = D / P(1 - F)

After-tax cost of new preferred shares = $13 / [$89(1 - 0.05)]

After-tax cost of new preferred shares = $13 / $84.55

After-tax cost of new preferred shares = 0.1538 or 15.38%