Higgins Office Corp. Plans to maintain its optimal capital structure of 40 perce

Question

Higgins Office Corp. Plans to maintain its optimal capital structure of 40 percent debt, 10 percent preferred stock, and 50 percent common equity indefinitely. The required return on each component source of capital is as follows: debt - 8 percent; preferred stock- 12 percent; common equity- 16 percent. Assuming a 40 percent marginal tax rate, what after tax rate of exchange must Higgins Office Corp. Earn on its investments if the value of the firm is to remain unchanged?

12.40 percent
12.00 percent
11.12 percent
10.64 percent

Explanation / Answer

Debt .4 (1-.4)*.08= .0192 Preferred .1*.12- .012 Equity .5* .16= .08 Sum is 0.1112 or 11.12% C)

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.