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

b. The firm's cost of equity is unaffected by a change in the firm's tax rate

c. The cost of equity can only be estimated using the SML approach

d. The firm's weighted average cost of capital will remain constant as long as the capital structure remains constant

Explanation / Answer

Hi,

Option B (The firm's cost of equity is unaffected by a change in the firm's tax rate) is correct.

Thanks.

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