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

question 125

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)12.7 percent
• D)13.6 percent

---

Definitions:

Hyperactive

Hyperactive describes a condition of having more energy and movement than is normal or desirable, often associated with attention deficit hyperactivity disorder (ADHD).

Hyper-

A prefix meaning above or excessive, used to describe conditions of overactivity or elevated levels (e.g., hypertension).

Dys-

A prefix in medical terms indicative of abnormal, difficult, or painful conditions.

Diagnosis

The identification of the nature of an illness or other problem by examination of the symptoms.