Question: ABC has the following market value capital structure, shown below, which is considered to be optimal. The firm has no preferred stock. Debt $350,000 Equity

ABC has the following market value capital structure, shown below, which is considered to be optimal. The firm has no preferred stock.

Debt $350,000

Equity $650,000

New bonds currently have a 10% coupon rate and ABC's stock sells for $20 per share. The expected growth rate in dividends is 8 percent. The corporate tax rate is 40 percent and the firm net income was $5 million. Finally, the firm paid 20% of its earning out as dividends.

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