Answer (D) is correct. Because the dividends on preferred stock are not deductible for tax purposes, the effect of income taxes is ignored. Thus, the relevant calculation is to divide the $8 annual dividend by the quantity of funds received from the issuance. In this case, the funds received equal $87 ($92 proceeds – $5 issue costs). Thus, the cost of capital is 9.2% ($8 ÷ $87).