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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