Biotec Has Estimated the Costs of Debt and Equity Capital

question 19

Multiple Choice

Biotec has estimated the costs of debt and equity capital for various proportions of debt in its capital structure: $\begin{array}{lll}\% \text { of Debt } & \text { Cost of Debt }(\%) &\text { Cost of Equity }(\%) \\35 & 5.4 & 13.8 \\40 & 5.6 & 14.0 \\45 & 5.9 & 14.3 \\50 & 6.4 & 14.7\end{array}$
If Biotec pays a current dividend of $1.00 and expects dividends to grow at a constant rate of 7%, what is Biotec's stock price if it obtains its optimal capital structure?

• A) $14.66
• B) $30.40
• C) $30.14
• D) $29.40

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Definitions:

Federal Reserve Deposits

Reserves held by commercial banks at the Federal Reserve, which are used to meet reserve requirements and facilitate day-to-day banking operations.

Check Clearing

The process by which banks settle transactions made by checks, ensuring that the funds move from the check writer's account to the recipient's.

Fractional Reserve Banking

A system in which depository institutions held reserves that are less than the amount of total deposits.

Actual Reserves

The amount of funds that a bank has on hand and in reserve accounts, which can be used to meet any withdrawal or payment demands.