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nirvana33 [79]
3 years ago
13

Beauty Inc. plans to maintain its optimal capital structure of 40 percent debt, 10 percent preferred stock, and 50 percent commo

n equity indefinitely. The required return on each component source of capital is as follows: debt—8 percent; preferred stock—12 percent; common equity—16 percent. Assuming a 40 percent marginal tax rate, what after-tax rate of return must the firm earn on its investments if the value of the firm is to remain unchanged?A) 12.40 percentB) 12.00 percentC) 11.12 percentD) 10.64 percent
Business
1 answer:
dlinn [17]3 years ago
3 0

Answer:

C) 11.12 percent

Explanation:

<u>We are asked to calculate the WACC with preferred stock</u>

WACC = K_e(\frac{E}{E+P+D}) + K_p(\frac{P}{E+P+D}) + K_d(1-t)(\frac{D}{E+P+D})

Ke = cost of capital =       0.16

Equity weight 0.50

Kp = cost of preferred=         0.12

Preferred Weight 0.10

Kd = cost of debt = 0.08

Debt Weight 0.40

t = tax rate 0.40

WACC = 0.16(0.5) + 0.12(0.1) + 0.08(1-0.4)(0.4)

WACC 11.12000%

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