Table B

A firm has determined its optimal structure which is composed of the following sources and target market value proportions.

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. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.10. 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.

1) The firm's after-tax cost of debt is ________. (See Table B)

A) 4.6 percent

B) 6 percent

C) 7 percent

D) 7.7 percent

2) The firm's cost of a new issue of common stock is ________. (See Table B)

A) 10.2 percent

B) 14.3 percent

C) 16.7 percent

D) 17.0 percent

3) The firm's cost of retained earnings is ________. (See Table B )

A) 10.2 percent

B) 14.3 percent

C) 16.7 percent

D) 17.0 percent

4) The weighted average cost of capital up to the point when retained earnings are exhausted is ________. (See Table B)

A) 6.8 percent

B) 7.7 percent

C) 9.44 percent

D) 11.29 percent