Based on current market values, Shawhan Supply 's capital structure is 30% debt, 20% preferred stock, and 50% common stock. When using book values, capital structure is 25% debt, 10% preferred stock, and 65% common stock
The required return on each component is: debt—10%; preferred stock—11%; and common stock—18%. The marginal tax rate is 40%. What rate of return must Shawhan Supply earn on its investments if the value of the firm is to remain unchanged?
A) 18.0%
B) 13.0%
C) 10.0%
D) 14.3%
Answer: B
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