Allison Engines Corporation Has Established a Target Capital Structure of 40

question 60

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 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:

Petroleum

A naturally occurring, yellowish-black liquid found in geological formations beneath the Earth's surface, commonly refined into various types of fuels.

Opportunity Cost

The cost of choosing one option over another, representing the benefits foregone from not choosing the next best alternative.

SUVs

Sport Utility Vehicles, a category of motor vehicles that combine elements of road-going passenger cars with features from off-road vehicles, like higher ground clearance and four-wheel drive.

Motorcycles

Two-wheeled vehicles powered by an engine, often used for transportation, recreation, or sport.