CPA Corporation is a steel manufacturer that finances its operations with 40 percent debt, 10 percent preferred stock, and 50 percent equity. The interest rate on the company’s debt is 11 percent. The preferred stock pays an annual dividend of $2 and sells for $20 a share. The company’s common stock trades at $30 a share, and its current dividend (D0) of $2 a share is expected to grow at a constant rate of 8 percent per year. The flotation cost of external equity is 15 percent of the dollar amount issued, while the flotation cost on preferred stock is 10 percent. The company estimates that its WACC is 12.30 percent. Assume that the firm will not have enough retained earnings to fund the equity portion of its capital budget. What is the company’s tax rate? • 30.33% • 38.12% • 32.87%
CPA Corporation is a steel manufacturer that finances its operations with 40 percent debt, 10 percent preferred stock, and 50 percent equity. The interest rate on the company’s debt is 11 percent. The preferred stock pays an annual dividend of $2 and sells for $20 a share. The company’s common stock trades at $30 a share, and its current dividend (D0) of $2 a share is expected to grow at a constant rate of 8 percent per year. The flotation
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
