e. preparing budgetary notes 4. Tangerine Inc.\'s target capital structure is 20

Question

e. preparing budgetary notes 4. Tangerine Inc.'s target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,000. The firm's marginal tax rate is 40 percent. The firm's policy is to use a risk premium of 4 percentage points when using the bond-yield-plus-risk- premium method to find the cost of retained earnings. Which of the following is Tangerine's component cost of retained earnings? a. 8 percent b. 10 percent c. 12 percent d. 14 percent e. 16 percent

Explanation / Answer

Using the bond-yield-plus-risk-premium method

Cost of Retained earnings is

=> (Bond Yield+ Risk Premium)

=>(12% + 4%)

=> 16 %

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