RED Inc. is evaluating a project that will increase annual sales by $175,000 and annual cash costs by $98,000. The project will initially require $130,000 in fixed assets that will be depreciated straight-line to a zero-book value over the 4-year life of the project. The applicable tax rate is 32 percent.

RED, Inc. is looking at raising additional capital for a future project. For RED, Inc. to determine whether this project is worth investing in, it must first determine the cost of the capital it will use to finance the project.

Q: The firm expects its preferred stocks to sell for $112.55. The firm pays a $12 annual dividend on its preferred stock. Calculate the cost of preferred stock.