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1. The firm's tax rate is 40%. 2. The current price of Legacy’s 10% coupon, noncallable...

1. The firm's tax rate is 40%. 2. The current price of Legacy’s 10% coupon, noncallable bonds with 10 years remaining to maturity is $1,100.00. Legacy does not use short-term interest-bearing debt on a permanent basis. 3. The current price of the firm’s 8%, $100 par value, perpetual preferred stock is $114.00. 4. Legacy’s common stock is currently selling at $45 per share. Its last dividend (D0) was $3.00, and dividends are expected to grow at a constant rate of 6.0% in the foreseeable future. Legacy’s beta is 1.1; the yield on T-bonds is 6.0%; and the market risk premium is estimated to be 5.5%. For the over-own-bond-yield-plus-judgmental-risk-premium approach, the firm uses a 4.0% judgmental risk premium. 5. Legacy’s capital structure is 40% long-term debt, 10% preferred stock, and 50% common equity.

What is the firm's cost of preferred stock?

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Answer #1
Cost of preferred stock (Rp) Annual dividend÷Stock price
Here,
Annual dividend $                                                  8.00
Preferred stock price $                                             114.00
Cost of preferred stock (Rp) 7.02%
8÷114
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