Question
Refer to the following information: A firm has determined its optimal capital structure, which is composed of the following sources and target market value proportions:
Refer to the following information:
A firm has determined its optimal capital structure, which is composed of the following sources and target market value proportions:
Source of Capital Target Mkt Proportions
Long-term debt 25%
Preferred stock 15%
Common stock equity 60%
DEBT: The firm has 9.5 percent coupon, $1,000 par value bonds outstanding that are currently selling for $1,067. They will mature in 10 years.
PREFERRED STOCK: The firm has determined that it can issue preferred stock at $100 per share. The stock will pay a $12.00 annual dividend. The cost of issuing and selling the preferred stock is $3 per share.
COMMON STOCK: A firms common stock is currently selling for $55 per share. The last dividend paid was $5.50. Dividends have been growing at a constant rate of 4.5 percent. Flotation costs for common stock are $2.75 per share.
Additionally, the firm has a marginal tax rate of 40 percent. The firm also expects to have $1,500,000 of retained earnings available to reinvest in the coming year.
What is the firm's before-tax cost of debt?
A.0.27%
B.9.50%
C.9.92%
D.8.48%
What is the firm's after-tax cost of debt?
A.5.09%
B.3.39%
C.5.95%
D.3.97%
What is the firm's cost of preferred stock?
A.12.00%
B.12.37%
C.9.00%
D.3.00%
What is the firm's cost of retained earnings?
A.14.50%
B.14.95%
C.15.03%
D.15.50%
What is the firm's cost of a new issue of common stock?
A.14.95%
B.14.50%
C.15.50%
D.15.03%
What is the firm's weighted average cost of capital up to the point when retained earnings are exhausted?
A.12.10%
B.12.43%
C.12.95%
D.14.95%
What is the firm's cost of capital after all of the retained earnings have been exhausted?
A.12.95%
B.12.43%
C.14.95%
D.12.10%
At what level of total new financing will the firm exhaust its retained earnings?
A.$2,500,000
B.$1,500,000
C.$600,000
D.$900,000
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