Back Bench Hats has a 15 percent dividend payout ratio, a beta of 2, and a tax r

Question

Back Bench Hats has a 15 percent dividend payout ratio, a beta of 2, and a tax rate of 38 percent. The firm has financed 50 percent of assets with common equity, 10 percent preferred equity, and 40 percent debt. Which of the following statements is correct?

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

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

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

D. The cost of equity can only be estimated using the capital asset pricing model.

E. The after tax cost of debt will be greater than the current yield-to-maturity on the firm's outstanding bonds.

Explanation / Answer

Answer

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

Explanation

Change in the tax rate affects cost of debt only

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