Assuming an after-tax cost of preferred stock of 10% and a corporate tax rate of 34%, a firm must earn at least $15.15 before tax on every $100 invested.

Question

Quizplus · Accepted Answer

The formula for calculating the before-tax cost of preferred stock is:

Before-tax cost of preferred stock = After-tax cost of preferred stock / (1 - Corporate tax rate)

Plugging in the given values, we get:

Before-tax cost of preferred stock = 10% / (1 - 34%) = 15.15%

This means that the firm must earn at least $15.15 before tax on every $100 invested in order to meet the cost of capital for preferred stock. Therefore, the statement is true.

Assuming an After-Tax Cost of Preferred Stock of 10% and a Corporate