Tangerine Inc.'s target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon rate, semiannual interest payments, a current maturity of 20 years, and a market value equal to their par value of $1,000. The firm's marginal tax rate is 40 percent. The firm's policy is to use a risk premium of 4 percentage points when using the bond-yield-plus-risk-premium method to determine its cost of retained earnings. What is Tangerine's component cost of retained earnings?
A. 8.0%
B. 9.6%
C. 11.2%
D. 14.4%
E. 16.0%
Answer: E
Business
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