A Firm Has Determined Its Optimal Capital Structure Which Is

question 11

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 aftertax cost of debt is

• A) 8.13 percent.
• B) 4.5 percent.
• C) 8 percent.
• D) 3.25 percent.

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Definitions:

Contractual Obligation

A legal duty established by a contract between parties, enforceable by law.

Raw Materials Inventory

The stock of materials and components that a company holds for the future production of goods.

Present Analysis

The evaluation of current financial metrics and economic conditions to make decisions or forecasts about future performance.

Equipment Replacement

Equipment Replacement involves the process of substituting old, inefficient, or broken equipment with newer, more efficient models to maintain operational efficiency.