A Firm Has Determined Its Optimal Structure Which Is Composed

question 93

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 beforetax cost of debt is

• A) 7.7 percent.
• B) 12.7 percent.
• C) 10.6 percent.
• D) 11.2 percent.

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Definitions:

Auditory Receptors

Cells or structures in the ear that are sensitive to sound, enabling hearing by converting sound waves into electrical signals.

Hair Cells

Sensory cells located in the inner ear of vertebrates, responsible for converting sound vibrations into electrical signals.

Graded Potential

A shift in the electrical charge across a neuron's membrane, varying in amplitude and potentially leading to an action potential.

Vibration Frequency

The number of times a vibrating system completes a cycle of motion in a given period of time, typically measured in hertz (Hz).