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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