Use Table 9.1 below to answer questions 21 to 24.
Table 9.1
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
Preferred stock
Common stock equity
Target Market
Proportions
20%
10
70
Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotation cost
of 2 percent of the face value would be required in addition to the discount of $40.
Preferred Stock: The firm has determined it can issue preferred stock at $75 per share par
value. The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is
$3 per share.
Common Stock: A firm's common stock is currently selling for $18 per share. The dividend
expected to be paid at the end of the coming year is $1.74. Its dividend payments have been
growing at a constant rate for the last four years. Four years ago, the dividend was $1.50. It is
expected that to sell, a new common stock issue must be underpriced $1 per share in
floatation costs. Additionally, the firm's marginal tax rate is 40 percent.
21) The firm's after-tax cost of debt is ______(See Table 9.1)
A) 3.25 percent
B) 4.6 percent
C) 7.7 percent
D) 8.13 percent
E) None of the above
22) The firm's cost of preferred stock is ______(See Table 9.1)
A) 7.2 percent
B) 8.3 percent
C) 13.3 percent
D) 13.9 percent
E) None of the above
23) The firm's cost of a new issue of common stock is ______(See Table 9.1)
A) 7 percent
B) 9.08 percent
C) 13.2 percent
D) 14.4 percent
E) None of the above
24) The firm's cost of retained earnings is ______(See Table 9.1)
A) 10.2 percent
B) 13.9 percent
C) 12.4 percent
D) 13.6 percent
E) None of the above
25) Which of the following are typical consequences of good capital budgeting decisions?
A) The firm increases in value.
B) The firm gains knowledge and experience that may be useful in future decisions.
C) Good capital budgeting decisions help a company define its core competencies.
D) All of the above.
E) None of the above
