Problem:

Morris Industries has a capital structure of 55 percent common stock, 10 percent preferred stock, and 35 percent debt. The firm has a 60 percent dividend payout ratio, a beta of 0.89, and a tax rate of 39 percent. Given this, which of the following statements is correct?

Required:

a. The after tax cost of the debt will be greater than the current yield to maturity of the firm's bonds.

b. The firm's cost of preferred is most likely less than the firm's actual cost of debt.

c. The firm's cost of equity is unaffected by the change in the firm's tax rate.

d. The cost of equity can only be calculated by the SML approach.

e. The firm's weighted average cost of capital will remain constant as long as the capital structure remains constant.

Note: Provide support for your rationale.