A firm has determined its optimal capital structure, which is composed of the following sources and target market value...
1. A firm has determined its optimal capital structure, which is composed of the following sources and target market value proportions:
Source of Capital
Long-term debt 30%
Preferred stock 5%
Common stock equity 65%
Debt:
The firm can sell a 20-year, $1,000 par value, 9 percent bond for $980. A
flotation cost of 2 percent of the face value would be required in
addition to the discount of $20.
Preferred Stock:
The firm has determined it can issue preferred stock at $65 per share
par value. The stock will pay an $8.00 annual dividend. The cost of
issuing and selling the stock is $3 per share. Common Stock:
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 $5.07. Its
dividend payments have been growing at a constant rate for the last
five years. Five years ago, the dividend was $3.45. It is expected that
to sell, a new common stock issue must be underpriced at $1 per share
and the firm must pay $1 per share in flotation costs. Additionally, the
firm's marginal tax rate is 40 percent.
Calculate the firm's weighted average cost of capital assuming the firm has exhausted all retained earnings.
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