Since 70% of the preferred dividends received by a corporation or institutional investor are excludedfrom taxable income, the component cost of equity for a company that pays half of its earnings out ascommon dividends and half as preferred dividends should, theoretically, be:Cost of equity = 8 × 0.30 × 0.50 + ¯ps × (1 − T) × 0.70 × 0.50, where T is the tax rate.TRUE or FALSE?FalseTrue

Cost of equity is the % cost that the company incurs if it raises new capital through sale of new…

Answered: Since 70% of the preferred dividends…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Similar questions

According to MM propositions, at what debt-equity ratio should the cost of equity be the lowest? Group of answer choices Zero if there is no tax and 1 if a non-zero tax rate is applied. Zero. Infinitely large Zero if there is no tax and indefinitely large if a non-zero tax rate is applied.
Horford Co. has no debt. Its cost of capital is 10 percent. Suppose the company converts to a debt-equity ratio of 1. The interest rate on the debt is 7.1 percent. Ignore taxes for this problem. a.What is the company’s new cost of equity? b.What is its new WACC?
Which of the following statements is most likely correct? 0.000 I. II. III. The higher the cost of equity and debt, the higher the cost of capital (WACC), with all else constant. The higher the cost of capital (WACC), the lower the value of the company, with all else constant. A lower corporate tax rate will incentivize firms to issue more debt than equity to reduce the cost of capital (WACC), with all else constant. I only Il only I and III I and II
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What is the ROE for a firm with a times interest earned ratio of 2, a tax liability of $1 million, and interest expense of $1.68 million if equity equals $1.68 million? O 23.81% O 25.22% 33.60% 40 48% 21
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a. What is the relative tax advantage of corporate debt if the corporate tax rate is TC=0.22, the personal tax rate on interest is TpD=0.37, but all equity income is received as capital gains and escapes tax entirely ( TpE=0 )? b. How does the relative tax advantage change if the company decides to pay out all equity income as cash dividends that are taxed at 10% ? Note: Do not round intermediate calculations. Round your answers to 4 decimal places.
Suppose that MNINK industries' capital structure features 63 percent equity, 7 percent preferred stock, and 30 percent debt. If the before-tax component costs of equity, preferred stock, and debt are 11.60 percent, 9.5 percent, and 9 percent, respectively, what is MNINK's WACC if the firm faces an average tax rate of 21 percent and can make full use of the interest tax shield?
According to MM propositions, at what debt-equity ratio the cost of equity should be lowest? Zero if there is no tax and indefinitely large if a non-zero tax rate is applied. Infinitely large Zero if there is no tax and 1 if a non-zero tax rate is applied. Zero
Suppose that MNINK Industries’ capital structure features 63 percent equity, 8 percent preferred stock, and 29 percent debt. Assume the before-tax component costs of equity, preferred stock, and debt are 11.40 percent, 9.30 percent, and 8.00 percent, respectively.What is MNINK’s WACC if the firm faces an average tax rate of 21 percent and can make full use of the interest tax shield? (Round your answer to 2 decimal places.)
Given the following information, compute the firm's WACC: • The firm's cost of equity = 16% • The firm's before-tax cost of long-term debt = 7% • The firm's capital structure is 35% long-term debt and 65% common equity • The firm's marginal tax rate = 25% O 10.25% O 12.85% 12.24% O 13.28%

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