A Firm Has Determined Its Optimal Structure Which Is Composed

question 75

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 firm's cost of a new issue of common stock is

• A) 14.3 percent.
• B) 10.2 percent.
• C) 16.7 percent.
• D) 17.0 percent.

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Definitions:

Self-awareness

An understanding of one's personal traits, sentiments, driving factors, and aspirations.

Self-recognition

The cognitive ability to recognize oneself in a mirror or photograph, often considered a milestone in self-awareness and identity development.

Categorical Self

A classification of the self children use to guide their behavior; based on broad ways in which people differ, such as sex, age, and physical characteristics.

Mirror

An object with a reflective surface that forms an image of whatever stands before it, commonly used for personal grooming or decorative purposes.