A Firm Has Determined Its Optimal Capital Structure Which Is

question 70

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 up to the point when retained earnings are exhausted is

• A) 11.2 percent.
• B) 8.65 percent.
• C) 10.4 percent.
• D) 7.5 percent.

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Definitions:

Column Heading

The title or label at the top of a column in a table or spreadsheet, indicating the type of data or information contained within the column.

Portrait Orientation

The vertical alignment of a document or image, where the height is greater than the width.

Database Table

A structured arrangement of data in rows and columns in a database, where each row typically represents a record and columns represent attributes of the record.

Redundancy

The inclusion of extra components that are not necessarily needed, often used in systems to increase reliability.