Assuming an after-tax cost of preference shares 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 after-tax cost of preference shares is 12% * (1 - 40%) = 7.2%. The firm must earn at least $20 before tax on every $100 invested, which is equivalent to an after-tax return of 20% * (1 - 40%) = 12%. Since the after-tax cost of preference shares is less than the required after-tax return, the statement is true.

Assuming an After-Tax Cost of Preference Shares of 12% and a Corporate