A firm has determined its optimal capital structure which is composed of the following sources $($long term debt is $20\%$ of proportion, preferred stock is $10\%,$ and common stock eqity is $70\%)$

and target market value proportions.

Debt: The firm can sell a $12-$year, $$1,000$ par value, $7$ percent bond for only $$960.$ A flotation

cost of $2$ percent of the face value would be required as well.

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\mathrm{.}74.$ Its dividend payments are expected to

grow at $4\%.$ 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.

$8)$ The firm's before$-$tax cost of debt is $\_\_\_\_\_\_\_\_.($See Table $9\mathrm{.}1)$

A$)7\mathrm{.}8$ percent

B$)10\mathrm{.}6$ percent

C$)11\mathrm{.}2$ percent

D$)12\mathrm{.}7$ percent

Answer:

$9)$ The firm's after$-$tax cost of debt is $\_\_\_\_\_\_\_\_.($See Table $9\mathrm{.}1)$

A$)3\mathrm{.}25$ percent

B$)4\mathrm{.}67$ percent

C$)8$ percent

D$)8\mathrm{.}13$ percent

Answer:

$10)$ The firm's cost of preferred stock is $\_\_\_\_\_\_\_\_.($See Table $9\mathrm{.}1)$

A$)7\mathrm{.}2$ percent

B$)8\mathrm{.}3$ percent

C$)13\mathrm{.}3$ percent

D$)13\mathrm{.}9$ percent

Answer:

$11)$ The firm's cost of a new issue of common stock is $\_\_\_\_\_\_\_\_.($See Table $9\mathrm{.}1)$

A$)7$ percent

B$)9\mathrm{.}08$ percent

C$)14\mathrm{.}2$ percent

D$)13\mathrm{.}4$ percent

Answer:

$12)$ The firm's cost of retained earnings is $\_\_\_\_\_\_\_\_.($See Table $9\mathrm{.}1)$

A$)10\mathrm{.}2$ percent

B$)13\mathrm{.}9$ percent

C$)13\mathrm{.}7$ percent

D$)13\mathrm{.}6$ percent

Answer