with working

A firm has determined its optimal structure which is composed of the following sources and target market value proportions. Source of Capital Target Market Proportions Long-term debt 35% Common stock equity 65% Debt: The firm can sell a 15-year, RM1,000 par value, 8 percent bond for RM1,050. A flotation cost of 2 percent of the face value would be required. Common Stock: A firm's common stock is currently selling for RM75 per share. The firm just paid a dividend of RM5. The growth rate of dividends is constant, that is at 10% every year. It is expected that to sell, a new common stock issue must be underpriced RM2 per share and the firm must pay RM1 per share in flotation costs. If the firm's marginal tax rate is 40 percent, (d) Explain the advantages of raising funds through combination of various sources of financing instead of using just one source of financing. (5 marks) |