Your Company's Stock Sells for $50 Per Share, Its Last

question 19

Multiple Choice

Your company's stock sells for $50 per share, its last dividend (D0) was $2.00, its growth rate is a constant 5 percent, and the company would incur a flotation cost of 15 percent if it sold new common stock.Net income for the coming year is expected to be $500,000 and the firm's payout ratio is 60 percent.The firm's common equity ratio is
30 percent and it has no preferred stock outstanding.The firm can borrow up to $300,000 at an interest rate of 7 percent; any additional debt will have an interest rate of 9 percent.Your company's tax rate is 40 percent.If the firm has a capital budget of $1,000,000, what is the WACC for the last dollar of capital the company raises?

• A)3.78%
• B)6.76%
• C)9.94%
• D)11.81%
• E)13.25%

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Definitions:

Corporations

Legal entities recognized by law, formed by individuals or groups to conduct business, which can own assets, incur liabilities, and sell equity.

Initial Stockholders

The original investors or owners of a company’s stock at the time of its issuance.

Newly Formed

Refers to an entity or organization that has recently been created or established.

Directors

Individuals elected by shareholders to oversee and make high-level decisions for a corporation, forming its board of directors.