Table 9.2 A Firm Has Determined Its Optimal Structure Which Is Composed

question 116

Multiple Choice

Table 9.2
A firm has determined its optimal structure which is composed of the following sources and target market value proportions. 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 before-tax cost of debt is ________. (See Table 9.2)

• A) 7.7 percent
• B) 10.6 percent
• C) 11.2 percent
• D) 12.7 percent

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Definitions:

Seasonal Revenues

Income generated from business activities that fluctuates according to the season or a particular time of year, typical in industries like retail and agriculture.

Full Disclosure

A principle that requires a company to provide all necessary information in its financial statements that affects the understanding of those statements.

Insider Information

Insider information involves confidential information about a company that has not been made public and that could provide a financial advantage in the markets if known.

Financial Markets

Marketplaces where buyers and sellers engage in trade of financial assets like stocks, bonds, currencies, and derivatives.