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

question 103

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 after-tax cost of debt is ________. (See Table 9.2)

Definitions:

Current Assets

Short-term assets that are expected to be converted into cash, sold, or consumed within one year or within the business's operating cycle, whichever is longer.

Operating Cycle

The average period of time between the purchase of goods or services and the receipt of cash from sales, typical in the context of a company's day-to-day operations.

APB Opinion No.22

A guideline issued by the Accounting Principles Board that requires companies to disclose their accounting policies in their financial statements.