A firm has determined its optimal structure which is composed

A firm has determined its optimal structure which is composed
Customer Question
A firm has determined its optimal structure which is composed of the following sources and target market value proportions.

source of capital target market proportions
Long term debt 60%
common stock equity 40%

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 before-tax cost of debt is ________. (See Table 11.2.)
A) 7.7 percent.
B) 10.6 percent.
C) 11.2 percent.
D) 12.7 percent.

The firm’s after-tax cost of debt is ________. (See Table 11.2.)
A) 4.6 percent.
B) 6 percent.
C)7 percent.
D) 7.7 percent.

The firm’s cost of a new issue of common stock is ________. (See Table 11.2.)
A) 10.2 percent.
B)14.3 percent.
C)16 .7 percent.
D) 17.0 percent.

The firm’s cost of retained earnings is ________. (See Table 11.2.)
A) 10.2 percent.
B) 14.3 percent.
C) 16.7 percent.
D) 17.0 percent.

The weighted average cost of capital up to the point when retained earnings are exhausted is ________. (See Table 11.2.)
A)6.8 percent.
B)7.7 percent.
C) 9.44 percent.
D) 11.29 percent.

Assuming the firm plans to pay out all of its earnings as dividends, the weighted average cost of capital is ________. (See Table 11.2.)
A) 9.6 percent.
B) 10.9 percent.
C)11.6 percent.
D) 12.1 percent.

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