A Firm Has Determined Its Optimal Structure Which Is Composed

question 89

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 cost of retained earnings is

• A) 10.2 percent.
• B) 14.3 percent.
• C) 17.0 percent.
• D) 16.7 percent.

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Definitions:

Fast and Effortless

Activities or processes that are completed quickly and with minimal mental or physical exertion.

Mind-Body Problem

The difficulty in understanding how the mind and body influence each other—so that physical events can cause mental events, and so that mental events can cause physical ones.

Descartes

A French philosopher, mathematician, and scientist whose work laid the foundation for much of modern philosophy, especially in regards to dualism and the relationship between the mind and body.

Separate

To cause to move or be apart; to divide.