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

Question

Quizplus · Accepted Answer

The Answer of 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