Beauty Inc plans to maintain its optimal capital structure of 40 percent debt, 10 percent preferred
stock, and 50 percent common equity indefinitely.
The required return on each component source
of capital is as follows: debtN8 percent; preferred stockN12 percent; common equityN16 percent.
Assuming a 40 percent marginal tax rate, what after-tax rate of return must the firm earn on its
investments if the value of the firm is to remain unchanged?
A) 10.64 percent B) 12.00 percent C) 12.40 percent D) 11.12 percent
Question 2
The more difficult it is to estimate a firm's cash flow needs, the greater the need to carry higher
precautionary balances.
Indicate whether the statement is true or false
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