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

question 35

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 cost of a new issue of common stock is ________. (See Table 9.1)

• A) 7 percent
• B) 9.08 percent
• C) 13.2 percent
• D) 14.4 percent

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Definitions:

Shield Volcano

A broad, gently sloping volcano built from highly fluid lava flows, often found in Hawaii and other Pacific regions.

Composite Volcano

A type of volcano built by the eruption of both lava flows and explosive material, resulting in a layered or composite structure, often found at convergent plate boundaries.

Volcanic Cinders

Small, porous fragments of lava that solidify before hitting the ground, typically ejected during explosive volcanic eruptions and forming cinder cones.

Scoria Cone

A small, steep-sided volcanic cone built from highly vesicular basaltic lava fragments.