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

question 92

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 weighted average cost of capital up to the point when retained earnings are exhausted is ________. (See Table 9.2)

• A) 6.8 percent
• B) 7.7 percent
• C) 9.44 percent
• D) 11.29 percent

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Definitions:

Sherman Act

An antitrust law passed by the United States Congress in 1890 that prohibits monopolistic practices and promotes competition by making it illegal to establish trusts that interfere with free trade.

Violation

The act of breaking or disregarding a law, agreement, or code of conduct.

Sherman Act

A foundational antitrust law passed by the U.S. Congress in 1890 aimed at preventing monopolies and promoting competition in business.

Concerted Activity

Activities undertaken jointly by employees for the purpose of collective bargaining or other mutual aid or protection regarding workplace conditions.