QUESTION $30$

Q$30-$ Q$33$ use the following information.

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

Long$-$term Debt : The firm can sell a $20-$year, $$1,000$ par value, $9$ percent coupon rate bond for $$980.$ A flotation cost of $2$ percent of the face value would be required to

sell the bond, and the firm's tax rate is $40$ percent.

Preferred Stock: The firm has determined it can issue preferred stock at $$65$ per share par value. The stock will pay an $$8\mathrm{.}00$ annual dividend. The cost of issuing and

selling the stock is $$3$ per share.

Common Stock Equity: Assuming today is the end of year $2023,$ the firm's common stock is currently selling for $$40$ per share. The dividend expected to be paid at the

end of the coming year is $$5\mathrm{.}07.$ Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $$3\mathrm{.}45($hence$,$ the

dividend growth rate is $6\mathrm{.}63\%).$ It is expected to sell a new common stock issue, the new issue will be underpriced by $$1$ per share and the firm must pay $$1$ per share in

flotation costs.

Q$30.$ What is the after$-$tax cost of debt?

$9\mathrm{.}22\%$

$9\mathrm{.}45\%$

$5\mathrm{.}53\%$

$5\mathrm{.}67\%$