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%

---

Definitions:

Par Value

The face value of a bond or the stated value of a share of stock, as assigned by the issuing company.

Book Value

The worth of an asset as indicated by its balance sheet account balance, which considers the asset's original cost less any depreciation, amortization, or impairment charges.

Dividends in Arrears

Unpaid dividends on preferred stock that accumulate until paid by the corporation, often before any dividends can be paid on common stock.

Par Value

A nominal or face value assigned to a share of stock, bonds, or other securities as stated in the corporate charter or on the stock certificate.