{"id":6723,"date":"2021-10-10T16:04:50","date_gmt":"2021-10-10T16:04:50","guid":{"rendered":"https:\/\/assignmenttutors.net\/blog\/a-firm-has-determined-its-optimal-capital-structure-which-is\/"},"modified":"2021-10-10T16:04:50","modified_gmt":"2021-10-10T16:04:50","slug":"a-firm-has-determined-its-optimal-capital-structure-which-is","status":"publish","type":"post","link":"https:\/\/assignmenttutors.net\/blog\/a-firm-has-determined-its-optimal-capital-structure-which-is\/","title":{"rendered":"A firm has determined its optimal capital structure, which is"},"content":{"rendered":"<div>\n<p>A firm has determined its optimal capital structure, which is composed of the following sources and target market value proportions.<\/p>\n<p>Table 1:<\/p>\n<p>Source of capital: long term debt\u00a0\u00a0 Target Market Proportions: 20% Source of capital: preferred stock Target Market Proportions: 10 Source of capital: common stock equity Target Market Proportions: 70 \u00a0\u00a0<\/p>\n<p>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.<\/p>\n<p>Preferred Stock: The firm has preferred stock selling at $72 per share par value. The stock pays a $10 annual dividend.<\/p>\n<p>Existing Common Stock: A firm&#8217;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 and the dividend rate has grown at 5% per year and should continue to do so for the forseeable future.<\/p>\n<p>New common stock if issued must be underpriced $1 per share in floatation costs.<\/p>\n<p>Additionally, the firm&#8217;s marginal tax rate is 40 percent.<\/p>\n<p>Questions are:<\/p>\n<p>1) What is the firm&#8217;s before-tax cost of debt? (See Table 1)<\/p>\n<p>2) What is the firm&#8217;s after-tax cost of debt? (See Table 1)<\/p>\n<p>3) What is the firm&#8217;s cost of preferred stock? (See Table 1)<\/p>\n<p>4) What is the firm&#8217;s cost of a new issue of common stock?<\/p>\n<p>5) The firm&#8217;s cost of retained earning is?<\/p>\n<p>6) The weighted average cost of capital up to the point when retained earnings are exhausted is?<\/p>\n<p>7) If the target market proportion of long term debt is reduced to 15 percent- increasing the proportion of common stock equity to 75 percent, what will be the revised weighted average cost of capital?<\/p>\n<p>4) What is the weighted<\/p>\n<p>average cost of capital? (See Table 1)<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>A firm has determined its optimal capital structure, which is composed of the following sources and target market value proportions. Table 1: Source of capital: long term debt\u00a0\u00a0 Target Market Proportions: 20% Source of capital: preferred stock Target Market Proportions: 10 Source of capital: common stock equity Target Market Proportions: 70 \u00a0\u00a0 Debt: The firm [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[31],"tags":[],"class_list":["post-6723","post","type-post","status-publish","format-standard","hentry","category-homework-help"],"_links":{"self":[{"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/posts\/6723","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/comments?post=6723"}],"version-history":[{"count":0,"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/posts\/6723\/revisions"}],"wp:attachment":[{"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/media?parent=6723"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/categories?post=6723"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/tags?post=6723"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}