A Firm Has Determined Its Optimal Capital Structure Which Is

question 62

Multiple Choice

A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.
$$\begin{array} { l c } \text { Source of capital } & \begin{array} { c } \text { Target market } \\\text { proportions }\end{array} \\\text { Long-term debt } & 20 \% \\\text { Preferred stock } & 10 \\\text { Common stock equity } & 70\end{array}$$
DEBT: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotation cost of 2 percent of the face value would be required in addition to the discount of $40.
PREFERRED STOCK: The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a
$10 annual dividend. The cost of issuing and selling the stock is $3 per share.
COMMON STOCK: A firm's common stock is currently selling for $18 per share. The dividend expected to be paid at the
end of the coming year is $1.74. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $1.50. It is expected that to sell, a new common stock issue must be underpriced $1 per share in
floatation costs. Additionally, the firm's marginal tax rate is 40 percent.

-The firm's cost of preferred stock is

• A) 8.3 percent.
• B) 13.3 percent.
• C) 13.9 percent.
• D) 7.2 percent.

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Definitions:

Richter Magnitude

A scale historically used to quantify the size of earthquakes based on the amplitude of seismic waves, replaced by the more accurate moment magnitude scale for large events.

Nomograph

A type of graph used in seismology to determine the local magnitude of an earthquake.

S-Wave Amplitude

The measure of the height of the secondary or shear waves, which are one type of seismic wave produced by earthquakes.

Strike-Slip Faults

Faults where two blocks of crust slide past each other horizontally, with little vertical motion.