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

question 15

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.
-The firm's cost of retained earnings is ________. (See Table 9.2)

• A) 10.2 percent
• B) 14.3 percent
• C) 16.7 percent
• D) 17.0 percent

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Definitions:

Layman's Terms

An expression used to describe the simplification of complex technical or specialized language into terms understandable by the general public.

Dining in Groups

The social activity of eating meals together with a number of people, which can influence food choices and consumption behaviors.

Conformity

The act of matching attitudes, beliefs, and behaviors to group norms or societal standards.

Obedience to Authority

The act of following orders or directions from someone in a position of power, even if one might personally disagree with the actions.