Calculate the After-Tax Cost of Preferred Stock for Ohio Valley

question 51

Multiple Choice

Calculate the after-tax cost of preferred stock for Ohio Valley Power Company, which is planning to sell $100 million of $3.25 cumulative preferred stock to the public at a price of $25 per share. Flotation costs are $1.00 per share. Ohio Valley has a marginal income tax rate of 40%.

• A) 13.0%
• B) 7.8%
• C) 8.12%
• D) 13.54%

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Definitions:

Tax Implications

The effect that various financial decisions have on one's tax liability, including income generation, investments, and deductions.

Flotation Costs

Expenses incurred by a company in issuing new securities, including fees to underwriters, lawyers, and accountants.

Administrative Fees

Charges that cover the operational costs of managing investments or conducting transactions.

WACC

Weighted Average Cost of Capital; a calculation of a firm’s cost of capital where each category of capital is proportionately weighted.