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After-tax rate of return

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Higgins Office Corp. 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: debt--8 percent; preferred stock--12 percent; common equity--16 percent. Assuming a 40 percent marginal tax rate, what after-tax rate of return must Higgins Office Corp. earn on its investments if the value of the firm is to remain unchanged?

a) 12.40 percent
b) 12.00 percent
c) 11.12 percent
d) 10.64 percent
e) 10.05 percent

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Solution Summary

This solution explains how to determine the after-tax rate of return so that the value remains unchanged.

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The firm should earn the WACC for the value to remain unchanged.
WACC ...

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