Question

Tangerine Inc.'s target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent...

Tangerine Inc.'s target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 10 percent coupon rate, semiannual interest payments, a current maturity of 20 years, and a market value equal to their par value of $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 determine its cost of retained earnings. What is Tangerine's component cost of equity( retained earnings)?

  

8.0%

11.2%

16%

14%

9.6%

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Homework Answers

Answer #1

As per the details given in the question-
Correct Answer is option D
If Market value of bond is equal to face value of bond then coupon rate is equal to TYM.
YTM =10% ( because coupon rate is 10%)
Cost of retained Earnings = Bond yeild + Risk premium
Cost of retained Earnind = 10 + 4
Cost of retained Earnind = 14%
Cost of retained earning is always greater than vost of debt because, equity shareholder take extra risk. Interest of payment is compulsory for debt holders.

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