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:

Bond Certificates

Documents that serve as legal proof of ownership of bonds, detailing the terms of the bond issue such as its maturity date, coupon rate, and issuer.

Market Value

The price that a buyer pays to purchase shares of capital stock in the open market. Of course, for every buyer there is a seller.

Face Value

The nominal or dollar value printed on a security or instrument, such as a bond or currency note.

Contract Rate

The agreed-upon rate specified in a contract for performing services or supplying goods.