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

---

Definitions:

Groupthink

A mental process in which the pursuit of agreement or uniformity among group members leads to illogical or ineffective conclusions in decision making.

Social Interference

The impact of social factors or interactions that disrupt or modify an individual's behavior or mental processes.

Groupthink

A psychological phenomenon that occurs within a group of people, where the desire for harmony or conformity results in an irrational or dysfunctional decision-making outcome.

Censoring

The suppression or prohibition of any parts of books, films, news, etc. that are considered obscene, politically unacceptable, or a threat to security.