Alpha Products Maintains a Capital Structure of 40 Percent Debt

question 5

Multiple Choice

Alpha Products maintains a capital structure of 40 percent debt and 60 percent common equity.To finance its capital budget for next year, the firm will sell $50 million of 11 percent debentures at par and finance the balance of its $125 million capital budget with retained earnings.Next year Alpha expects net income to grow 7 percent to $140 million, and dividends also are expected to increase 7 percent to $1.40 per share and to continue growing at that rate for the foreseeable future.The current market value of Alpha's stock is $30.If the firm has a marginal tax rate of 40 percent, what is its weighted cost of capital for the coming year?

• A)9.64%
• B)8.63%
• C)9.84%
• D)11.67%

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Definitions:

Basic Earnings Per Share

A measure of a company's profitability on a per-share basis, calculated by dividing net income by the number of outstanding ordinary shares.

Weighted Average

A calculation that takes into account the varying degrees of importance of the numbers in a data set, assigning weights to each number.

Short-term Creditor

A creditor that provides loans or credit to a business or individual with an expectation of repayment within a short period, typically less than a year.

Liquidity

The ability of an asset to be quickly converted into cash without losing its value.