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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

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. The dividends are expected to grow at a constant rate of 8%. 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. Assuming the firm plans to pay out all of its earnings as dividends, calculate the weighted average cost of capital (WACC) of the firm.

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