A company has preferred stock that can be sold for $21 per share. The preferred stock pays an annual dividend of 3.5% based on a par value of $100. Flotation costs associated with the sale of preferred stock equal $1.25 per share. The company's marginal tax rate is 35%. Therefore, the cost of preferred stock is: (Points : 1)

18.87

To calculate the cost of preferred stock, we need to consider the dividend paid, the flotation costs, and the tax rate.

First, let's calculate the dividend paid per share:
Dividend = Annual Dividend Rate x Par Value
Dividend = 3.5% x $100
Dividend = $3.50

Next, let's consider the flotation costs per share: $1.25

Now, let's calculate the net proceeds per share after deducting the flotation costs:
Net Proceeds = Selling Price - Flotation Costs
Net Proceeds = $21 - $1.25
Net Proceeds = $19.75

Since preferred stock dividends are not tax-deductible for the company, the after-tax cost of preferred stock can be calculated as follows:
Cost of Preferred Stock = Net Proceeds / (Selling Price - Flotation Costs)

Cost of Preferred Stock = $19.75 / $21

Finally, let's calculate the cost of preferred stock with the given values:
Cost of Preferred Stock = $19.75 / $21 = 0.94048 or 94.05%

Therefore, the cost of preferred stock is approximately 94.05%.