Fjord Luxury Liners has preferred shares outstanding that pay an annual dividend equal to $7 per year. If the current price of Fjord preferred shares is $94, what is the after-tax cost of preferred stock for Fjord?
To calculate the after-tax cost of preferred stock, you need to consider the dividend received and the tax rate applied to that dividend.
First, let's determine the dividend yield, which is the annual dividend divided by the current price of the preferred shares:
Dividend yield = Annual Dividend / Current Price
Dividend yield = $7 / $94 = 0.0745 (approximately)
Next, find out the after-tax dividend by considering the tax rate applied to the dividend.
Assuming a tax rate of 20%, you can calculate the after-tax dividend:
After-tax Dividend = Annual Dividend * (1 - Tax Rate)
After-tax Dividend = $7 * (1 - 0.20) = $7 * 0.80 = $5.60
So, the after-tax cost of preferred stock for Fjord is $5.60 per year.