Coco Company is financed entirely by common stock which is priced to offer a 10% return and pays tax at the rate of 40 percent.If the company repurchases 40% of the stock and substitutes an equal value of debt costing 7%,what is the cost on the common stock after repurchasing?
A) 10%
B) 11.2%
C) 12%
D) None of the above

Question

Quizplus · Accepted Answer

K_e = K_u+ (K_u - K_D) (1−T) D/S_L → K_e = 10%_u+ (10%− 7%) ) (1−.4) (0.4/0.6)=11.2%

Coco Company Is Financed Entirely by Common Stock Which Is