Question
A firm has determined its optimal structure which is composed of the following sources and target market value proportions, long-term debt 45% and common stock
A firm has determined its optimal structure which is composed of the following sources and target market value proportions, long-term debt 45% and common stock equity 55%.
Debt: The firm can sell a 16-year, $1,000 par value, 11 percent bond for $1,030. A flotation cost of 1 percent of the face value would be required. Additionally, the firm has a marginal tax rate of 35 percent.
Common Stock: the firms common stock is currently selling for $75 per share. The stock must be underpriced by $3 per share, and the flotation costs are expected to amount to $2 per share. The firm expects to pay cash dividends of $4.20 per share next year. The dividends paid on the outstanding stock over the past 5 years (20102014) were as follows:
Calculate the weighted average cost of capital up to the point when retained earnings are exhausted?
Year | Dividend |
2014 | 3.94 |
2013 | 3.70 |
2012 | 3.42 |
2011 | 3.12 |
2010 | 3.00 |
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