Cost of Capital 2. A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions. Source of Capital Long-term debt Preferred stock Common stock equity Target Market Proportions 20% 10 70 Debt: The firm can sell a 12-year, $1,000 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. 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 $1.74. Its dividend payments have been growing at A rate of 2.73% for the last four years. It is expected that floatation costs will be $1 per share Additionally, the firm's marginal tax rate is 40 percent. 3