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

question 118

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 retained earnings is ________. (See Table 9.1)

• A) 10.2 percent
• B) 13.9 percent
• C) 12.4 percent
• D) 13.6 percent

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Definitions:

Tech Support Department

A functional division within a company that provides technical assistance and support services to its customers or users.

Customer Cost Analysis

An evaluation technique to determine the total cost incurred by a business to produce, sell, and distribute a product to a specific customer.

Total Cost Assigned

The aggregate cost allocated to a specific product, job, or project, including direct and indirect costs.

Time-Driven Activity-Based Costing

An accounting method that assigns costs to products or services based on the time required for each activity involved in production or service delivery.