A Firm Has Determined Its Optimal Structure Which Is Composed

question 113

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 aftertax cost of debt is

• A) 7.7 percent.
• B) 7 percent.
• C) 4.7 percent.
• D) 6 percent.

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Definitions:

Dispositional Causes

Factors related to an individual's personality traits or characteristics that influence behavior.

Conformity Rates

The likelihood or rate at which individuals adapt their behavior or beliefs to match those of a group.

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A group of people sworn to render a verdict or true answer on a question officially submitted to them in a court of law.