A Firm Has Determined Its Optimal Structure Which Is Composed

question 91

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.

-Assuming the firm plans to pay out all of its earnings as dividends, the weighted average cost of capital is

• A) 10.9 percent.
• B) 11.6 percent.
• C) 9.6 percent.
• D) 12.1 percent.

---

Definitions:

Radial

Refers to structures arranged like rays that extend from or converge to a common center, often used in anatomical contexts.

Carotid

Pertaining to the carotid artery.

Carotid

Referring to the main arteries in the neck that supply blood to the head and brain.

Radial

Relating to or situated near the radius or forearm; or extending in a direction outward from a common center.