Part 1: Grill Works and More has 8 percent preferred stock outstanding that is c

Question

Part 1: Grill Works and More has 8 percent preferred stock outstanding that is currently selling for $55 a share. The market rate of return is 11 percent and the firm's tax rate is 34 percent. What is the firm's cost of preferred stock? A) 14.55 percent B) 9.60 percent C) 11.95 percent D) 13.22 percent E) 8.73 percent Part 2: Central Systems, Inc. desires a weighted average cost of capital of 10 percent. The firm has an after-tax cost of debt of 6 percent and a cost of equity of 12 percent. What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital? A) .33 B) .50 C) .40 D) .67 E) .60

Explanation / Answer

1. C) 11.95 percent 2. E) .60

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