28 Jun Question A ?rm has determined its optimal capital
Question
A ?rm has determined its optimal capital structure which is composed of the following sources and target market
value proportions. Target MarEet Source of lI’Japital Proportions
Long—term debt 20%
Preferred stock 10 Common stock egpig TD Debt: The ?rm can sell a 12—year, $1,411] par value; 5′ percent bond for $964]. A ?otation 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 $55 per share par value. The stock will
pay a $10 annual dividend. The cost of issuing and selling the stock is $3 per share. lI’Con’unon Stock: A ?rm’s common stock is currently selling for $18 per share. The dividend expected to be paid at the end of the coming year is $134. Its dividend payments have been growing at a constant rate for the last four
years. Four years ago, the dividend was $1.51}. It is expected that to sell, a new common stock issue must be underpricecl $1 per share in ?oatation costs. Additionally, the ?rm’s marginal tax rate is 41D percent.
If the firm has exhausted all retained earnings, how to calculate the firm’s weighted average cost of capital?
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