Fjord Luxury Liners has preferred shares outstanding that pay an annual dividend equal to $6 per year. If the current price of Fjord preferred shares is $181, what is the after-tax cost of preferred stock for Fjord? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)
After-tax cost of preferred stock =
To calculate the after-tax cost of preferred stock for Fjord, we need to consider the dividend payment and the tax implications.
1. Calculate the dividend yield:
Dividend yield = Annual dividend / Price of preferred shares
In this case, the annual dividend is $6 and the current price of Fjord preferred shares is $181.
Dividend yield = $6 / $181 = 0.0331491706
2. Calculate the after-tax cost of preferred stock:
After-tax cost of preferred stock = Dividend yield / (1 - Tax rate)
The tax rate represents the percentage of the dividend that is subject to tax. Let's assume a tax rate of 20%, which means 80% of the dividend is not taxed.
After-tax cost of preferred stock = 0.0331491706 / (1 - 0.2) = 0.0414364633
To convert this decimal into a percentage, multiply by 100:
After-tax cost of preferred stock = 0.0414364633 * 100 = 4.14%
Therefore, the after-tax cost of preferred stock for Fjord is 4.14%.