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A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions. Target Market Proportions Source of
A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions. Target Market Proportions Source of Capital Long-term debt Preferred stock Common stock equity 20% 10 70 A 10.6 percent B. 12.7 percent c. 7.8 percent D. 112 percent Debt: The firm can sell a 12 year, Si,ooo par value, 7 percent bond for $960. A flotation cost of 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 par value. The stock will pay a $10 annual dividend. Th 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 payments have been growing at a constant rate for the last four years. Four years ago, the dividend was $1.50. It is expected that to sell, a new must be underpriced st per share in floatation costs. Additionally, the firm's marginal tax rate is 40 percent. The firm's before - tax cost of debt is -(see Table 9.1) CA. 10.6 percent OB. 12.7 percent ac 7.8 percent D. 11.2 percent
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