A Company Has Preferred Stock with a Current Market Price

question 26

Multiple Choice

A company has preferred stock with a current market price of $18 per share.The preferred stock pays an annual dividend of 4% based on a par value of $100.Flotation costs associated with the sale of preferred stock equal $1.50 per share.The company's marginal tax rate is 40%.Therefore,the cost of preferred stock is

• A) 28.80%.
• B) 24.24%.
• C) 22.22%.
• D) 14.55%.

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Definitions:

Productive Efficiency

A situation where a system or economy can no longer produce additional amounts of a good without lowering the production level of another product.

Allocative Efficiency

A state of the economy where the distribution of resources among different uses is optimal, maximizing total societal welfare.

Equilibrium Price

The price at which the quantity of a good or service demanded by consumers equals the quantity supplied by producers, establishing market balance.

Equilibrium Quantity

The level of goods or services supplied matches the consumer demand at the price which establishes market equilibrium.