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

question 66

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 weighted average cost of capital up to the point when retained earnings are exhausted is ________.(See Table 9.2)

• A)6.8 percent
• B)7.7 percent
• C)8.7 percent
• D)11.29 percent

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