Allison Engines Corporation Has Established a Target Capital Structure of 40

question 62

Multiple Choice

Allison Engines Corporation has established a target capital structure of 40 percent debt and 60 percent common equity.The firm expects to earn $600 in after-tax income during the coming year, and it will retain 40 percent of those earnings.The current market price of the firm's stock is P0 = $28; its last dividend was D0 = $2.20, and its expected dividend growth rate is 6 percent.Allison can issue new common stock at a 15 percent flotation cost.What
Will Allison's marginal cost of equity capital (not the WACC) be if it must fund a capital budget requiring $600 in total new capital?

• A)15.8%
• B)13.9%
• C)7.9%
• D)14.3%
• E)9.7%

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Definitions:

Sackville Waterfowl Park

The Sackville Waterfowl Park is a nature reserve located in Sackville, New Brunswick, Canada, known for its diverse range of bird species and conservation efforts.

New Brunswick

A province in eastern Canada, known for its forested terrain, rivers, and coastal landscapes along the Atlantic Ocean.

Salmon Populations

Groups of salmon within a specific area or ecosystem, often monitored for conservation and fishing purposes.

Whaling Activities

The practice of hunting and capturing whales for their resources such as meat, oil, and blubber.