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 ________.
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 ________.
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 ________.
A) 10.2 percent.
B)14.3 percent.
C)16 .7 percent.
D) 17.0 percent.
The firm's cost of retained earnings is ________.
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 ________.
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 ________.
A) 9.6 percent.
B) 10.9 percent.
C)11.6 percent.
D) 12.1 percent.