Jones Company Has a Target Capital Structure of 30% Debt,15

question 3

Multiple Choice

Jones Company has a target capital structure of 30% debt,15% preferred stock,and 55% common equity.The company's after-tax cost of debt is 7%,its cost of preferred stock is 11%,its cost of retained earnings is 15%,and its cost of new common stock is 16%.The company stock has a beta of 1.5 and the company's marginal tax rate is 35%.What is the company's weighted average cost of capital if retained earnings are used to fund the common equity portion?

• A) 11.20%
• B) 12.00%
• C) 13.80%
• D) 14.45%

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Definitions:

Net Present Value

A method used in capital budgeting to evaluate the profitability of an investment by calculating the difference between the present value of cash inflows and outflows over a period of time.

Working Capital

The difference between a company's current assets and its current liabilities, indicating the liquidity and operational efficiency of the business.

Salvage Value

The forecasted value at which an asset can be resold once it's no longer useful.

Cash Inflows

The total amount of money being transferred into a company, typically from operational, investment, and financing activities.