Table 9.1A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.Source of CapitalLong-term debtPreferred stockCommon stock equityTarget MarketProportionsOA. 8.13 percentOB. 4.67 percentOC. 8 percentO D. 3.25 percent20%1070Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotation cost of2 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 aconstant 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 after-tax cost of debt is(See Table 9.1)

After tax cost of debt is the yield to maturity of bond that is realized on the bond by holding of…

Source of Capital Long-term debt Preferred stock Common stock equity Proportions OA. 8.13 percent 4 67 percent 20% 10 70 Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotat 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 Common Stock: A firm's common stock is currently selling for $18 per share. The divi constant rate for the last four years. Four years ago, the dividend was $1.50. It is expe the firm's marginal tax rate is 40 percent. The firm's after-tax cost of debt is (See Table 9.1)

Source of Capital Long-term debt Preferred stock Common stock equity Proportions OA. 8.13 percent 4 67 percent 20% 10 70 Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotat 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 Common Stock: A firm's common stock is currently selling for $18 per share. The divi constant rate for the last four years. Four years ago, the dividend was $1.50. It is expe the firm's marginal tax rate is 40 percent. The firm's after-tax cost of debt is (See Table 9.1)

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter7: Types And Costs Of Financial Capital

Section: Chapter Questions

Problem 11EP

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