Sadaplast Has a Target Capital Structure of 65% Common Equity

question 93

Multiple Choice

Sadaplast has a target capital structure of 65% common equity, 30% debt, and 5% preferred stock. The cost of retained earnings is 14%, and the cost of new equity is 15.5%. Sadaplast expects to have a net income of $85 million in the coming year. If the firm sells bonds, up to $25 million can be sold at par value to yield an after-tax cost of 5.4%. An additional $20 million of debentures could be sold to yield an after-tax cost of 7.0%. The after-tax cost of preferred stock financing is estimated to be 11%. Sadaplast has a dividend payout ratio of 25%. What is Sadaplast's cost of capital between the first and second break points?

• A) 12.25%
• B) 11.27%
• C) 11.75%
• D) 12.73%

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Definitions:

Variable-Ratio

A reinforcement schedule where a response is reinforced after an unpredictable number of responses, promoting high and steady response rates.

Contingency

A future event or circumstance that is possible but cannot be predicted with certainty, often used in psychology to describe the relationship between behavior and its consequences.

DRO

Differential Reinforcement of Other behavior, a technique used in behavioral therapy to encourage the occurrence of desired behaviors by only rewarding behaviors other than the undesirable one.

Variable-Ratio

A reinforcement pattern in which a reaction is rewarded following a random number of responses, resulting in consistent and elevated rates of response.