Morris Industries has a capital structure of 55 percent common stock, 10 percent

Question

Morris Industries has a capital structure of 55 percent common stock, 10 percent preferred stock, and 35 percent debt. The firm has a 60 percent dividend payout ratio, a beta of 0.89, and a tax rate of 38 percent. Given this, which one of the following statements is correct? A) The aftertax cost of debt will be greater than the current yield to maturity on the firm's bonds B) The firms cost of preferred is most likely less than the firm's actual cost of debt. C) The firms cost of equity is unaffected by a change in the firm's tax rate. D) The cost of equity can only be estimated using the SML approach. E) the firms weighted average cost of capital will remain constant as long as the capital structure remains constant.

Explanation / Answer

Here, the cost of equity will be calculated by using capital asset pricing model, and tax is not a component of this model, so that the cost of equity will be unaffected by the change in tax rate. Therefore, the correct answer is option C.

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.