11-10 Burger Queen can sell preferred stock for $70 with an estimated flotation cost of $2.50. It is anticipated that the preferred stock will pay $6 per share in dividends a. Compute the cost of preferred stock for Burger Queen b. Do we need to make a tax adjustment for the issuing firm? Solution: Burger Queen D K P-F 6.00 $70.00-$2.50 $67.50 8.89% b. No tax adjustment is required Preferred stock dividends are not a tax deductible expense for the issuing firm(the dividends, of course are 70 percent tax exempt to a corporate recipient) CopyrightC 2005 by The McGray-Hill Companies, Inc.Copyright © 2005 by The McGraw-Hill Companies, Inc. S-390 11-10. Burger Queen can sell preferred stock for $70 with an estimated flotation cost of $2.50. It is anticipated that the preferred stock will pay $6 per share in dividends. a. Compute the cost of preferred stock for Burger Queen. b. Do we need to make a tax adjustment for the issuing firm? Solution: Burger Queen 8.89% $67.50 $6.00 $70.00 $2.50 $6.00 P F D a. K p p p = = − = − = b. No tax adjustment is required. Preferred stock dividends are not a tax deductible expense for the issuing firm (the dividends, of course, are 70 percent tax exempt to a corporate recipient)