A Firm Has Determined Its Optimal Capital Structure Which Is

question 87

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 firm's cost of retained earnings is (See Figure 9.1)

• A) 13.6 percent.
• B) 13.9 percent.
• C) 10.2 percent.
• D) 12.7 percent.

---

Definitions:

Passionate Love

An intense, deep affection for someone that involves sexual attraction, emotional connection, and longing.

Decades

Periods of ten years, often used to measure time in a broad sense or to refer to specific historical or personal eras.

Passionate Love

An intense, emotional state of longing and desire often characterized by feelings of attraction, affection, and fantasy about a romantic partner.

Infatuated

Strong but short-lived passion or admiration for someone.