A Firm Has Determined Its Optimal Structure Which Is Composed

question 132

Multiple Choice

A firm has determined its optimal structure which is composed of the following sources and target market value proportions.
$$\begin{array} { l c } \text { Source of capital } & \begin{array} { c } \text { Target market } \\\text { Proportions }\end{array} \\\hline \text { Long-term debt } & 60 \% \\\text { Common stock equity } & 40\end{array}$$
DEBT: The firm can sell a 15-year, $1,000 par value, 8 percent bond for $1,050. A flotation cost of 2 percent of the face value would be required in addition to the premium of $50.
COMMON STOCK: A firm's common stock is currently selling for $75 per share. The dividend expected to be paid at the end of the coming year is $5. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.10. It is expected that to sell, a new common stock issue must be underpriced $2 per share and the firm must pay $1 per share in flotation costs. Additionally, the firm has a marginal tax rate of 40 percent.

-The weighted average cost of capital up to the point when retained earnings are exhausted is

• A) 9.5 percent.
• B) 11.3 percent.
• C) 7.7 percent.
• D) 6.8 percent.

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Definitions:

Semiconductors

Materials with electrical conductivity between that of a conductor and an insulator, used in electronic components for controlling electrical current.

Conductors

Materials that allow the flow of electric current through them, often used in electrical wiring and components.

Insulators

Materials or objects that do not easily conduct electricity, used to prevent unwanted flow of current.

Electromotive Force

The energy supplied per charge by a source of electrical energy, such as a battery or generator, measured in volts.