Table 9.1 A Firm Has Determined Its Optimal Capital Structure Which Is

question 119

Multiple Choice

Table 9.1
A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions. Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotation cost of
2 percent of the face value would be required in addition to the discount of $40.
Preferred Stock: The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is $3 per share.
Common Stock: A firm's common stock is currently selling for $18 per share. The dividend expected to be paid at the end of the coming year is $1.74. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was $1.50. It is expected that to sell, a new common stock issue must be underpriced $1 per share in floatation costs. Additionally, the firm's marginal tax rate is 40 percent.
-The firm's after-tax cost of debt is ________. (See Table 9.1)

• A) 3.25 percent
• B) 4.6 percent
• C) 8 percent
• D) 8.13 percent

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Definitions:

Year 2

Typically refers to the second year of a particular time frame, such as a business plan, financial projections, or an academic calendar.

Total Asset Turnover

A financial ratio that measures a company's ability to generate sales from its assets, indicating operational efficiency.

Accounts Receivable Turnover

A financial ratio indicating how many times a company's accounts receivable are collected during a certain period, reflecting its efficiency in extending credit and collecting debts.

Times Interest Earned Ratio

A financial ratio that measures a company's ability to honor its debt payments by comparing its interest expense to its operating income.