Table 9.2

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

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

Target Market

Source of Capital Proportions

Longterm debt 60%

Common stock equity 40

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 9.2)

A. 7% B. 6% C. 7.75 D. 4.65

2. The firm's cost of a new issue of common stock is ________.

A. 16.77 B. 10.21 C. 15.24 D. 14.35

3. The firm's cost of retained earnings is ________.

A. 14.96 B 17 C. 14.01 D. 10.2

4. The weighted average cost of capital up to the point when retained earnings are exhausted is________.

A. 6.8 B. 11.29 C. 8.74 D. 7.7