Assuming an after-tax cost of preferred stock of 12% and a corporate tax rate of 40%,a firm must earn at least $20 before tax on every $100 invested.

Question

Quizplus · Accepted Answer

The calculation for minimum required return on investment for the firm can be done as follows:

After-tax cost of preferred stock = 12%
Corporate tax rate = 40%

Therefore, the pre-tax cost of preferred stock would be:

Pre-tax cost of preferred stock = 12% / (1 - 40%) = 20%

This means that the firm must earn at least $20 before tax on every $100 invested in order to meet the required return of 20%. Therefore, the statement given in option A is true.

Assuming an After-Tax Cost of Preferred Stock of 12% and a Corporate