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Question
Heavy Metal Corp. is a steel manufacturer that finances its operations with 40 percent debt, 10 percent preferred stock, and 50 percent equity. Its net income is $100 million and it has a payout ratio of 35 percent. The interest rate on the company's debt is 11 percent. The preferred stock pays an annual dividend of $2 and sells for $20 a share. The company's common stock trades at $30 a share and its current dividend (D0) of $2 a share is expected to grow at a constant rate of 8 percent per year. The flotation cost of external equity is 15 percent of the dollar amount issued, while the flotation cost on preferred stock is 10 percent. The company estimates that its WACC is 12.30 percent. Assume that the company is raising $150 million in total capital. What is the company's tax rate?
a. 30.33%
b. 32.87%
c. 35.75%
d. 38.12%
e. 40.98%
Answer
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