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

question 49

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.
-Assuming the firm plans to pay out all of its earnings as dividends, the weighted average cost of capital is ________. (See Table 9.2)

• A) 9.6 percent
• B) 10.9 percent
• C) 11.6 percent
• D) 12.1 percent

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Definitions:

Social Comparison Theory

A concept that people evaluate their own abilities and opinions by comparing themselves to others.

Introspection

The process by which a person examines the contents of his or her mind and mental states.

Mental States

Conditions of mind or consciousness, including emotions, attitudes, beliefs, and thoughts.

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The concept that an individual's self is shaped by interactions with others and the perception of how others view them.