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 45 percent debt. The rifm has a 60 percent dividend payout ration, a beta of 0.89, and a tax rate of 38 percent. Given this, which one of the following statements is correct?

A. The cost of equity can only be estimated using the SML approach.
B. The firm's weighted average cost of capital will remain constant as long as the capital structure remains constant.
C. The firm's cost of equity is unaffected by a change in the firm's tax rate.
D. The firm's cost of preferred is most likely less than the firm's actual cost of debt.
E. The aftertax cost of debt will be greater than the current yield-to-maturity on the firm's bonds.

Explanation / Answer

D. The firm's cost of preferred is most likely less than the firm's actual cost of debt.

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