Question

YYY Corporation is raising capital through the issuance of Preferred Stocks selling at $571 per share...

YYY Corporation is raising capital through the issuance of Preferred Stocks selling at $571 per share and promises dividends of $23 per year. This company is expected to grow at 9% per year. The broker for this financial operation will charge 8% in fees per share sold. Given that the aggregate corporate tax rate for this company is 36%, compute this Preferred Stock issuance's after tax cost of capital for the corporation. Write your answer as percentage

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Answer #1

Given about YYY corporation's preferred stock,

Current price P0 = $571

Dividend D1 = $23

growth rate = 9%

fee charged = flotation cost F = 8%

So, cost of preferred stock using constant dividend growth rate is

Kp = D1/(P0*(1-F)) + g = 23/(571*(1-0.08)) + 0.09 = 13.38%

So, Pretax cost of preferred stock = 13.38%

Since preferred stock does not carry any tax obligation so the after-tax cost = pretax cost.

So, Preferred Stock issuance's after tax cost of capital for the corporation = 13.38%

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