A Firm Has Determined Its Optimal Capital Structure Which Is

question 41

Multiple Choice

A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.
$$\begin{array} { l c } \text { Source of capital } & \begin{array} { c } \text { Target market } \\\text { proportions }\end{array} \\\hline \text { Long-term debt } & 20 \% \\\text { Preferred stock } & 10 \\\text { Common stock equity } & 70\end{array}$$
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 weighted average cost of capital after all retained earnings are exhausted is

• A) 13.6 percent.
• B) 10.4 percent.
• C) 11.0 percent.
• D) 11.5 percent.

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Definitions:

Central Route

A method of persuasion that involves deeply processing the content of the message, leading to lasting attitude change.

Cognitive Dissonance

A state of mental discomfort occurring when a person holds conflicting beliefs, attitudes, or values, leading to motivation to reduce the dissonance.

Attitude Accessibility

The ease with which an attitude can be retrieved from memory, impacting how quickly and consistently it influences an individual's response to related objects or situations.

Implicit Attitudes

Unconscious beliefs or feelings that may influence behavior and understanding, without conscious awareness.