J. Ross and Sons Inc

question 21

Multiple Choice

J. Ross and Sons Inc.
J. Ross and Sons Inc. has a target capital structure that calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. The firm's current after-tax cost of debt is 6 percent, and it can sell as much debt as it wishes at this rate. The firm's preferred stock currently sells for $90 a share and pays a dividend of $10 per share; however, the firm will net only $80 per share from the sale of new preferred stock. Ross expects to retain $15,000 in earnings over the next year. Ross' common stock currently sells for $40 per share, but the firm will net only $34 per share from the sale of new common stock. The firm recently paid a dividend of $2 per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 10 percent per year.
-Refer to J.Ross and Sons Inc.What will be the WACC above this break point?

• A)12.5%
• B)8.3%
• C)10.6%
• D)11.9%
• E)14.1%

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Definitions:

Overseas Production

The manufacturing of goods in a country different from where the products are sold, often to take advantage of lower labor costs or other economic conditions.