Subject: Finance 2. A firm has determined its optimal structure which is...
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Finance
Subject: Finance
2. A firm has determined its optimal structure which is composed of the following sources and target market value proportions. Target Market Source of Capital Proportions Long-term debt 60% Common stock equity 40 Debt: The firm can sell a 15-year, $1,000 par value, 8 percent bond for $1,050. A flotation cost of 2 percent of the face value would be required in addition to the premium of $50. Common Stock: A firm's common stock is currently selling for $75 per share. The dividend expected to be paid at the end of the coming year is $5. The dividends are expected to grow at a constant rate of 8%. It is expected that to sell, a new common stock issue must be underpriced $2 per share and the firm must pay per share in flotation costs. Additionally, the firm has a marginal tax rate of 40 percent. Assuming the firm plans to pay out all of its earnings as dividends, calculate the weighted average cost of capital (WACC) of the firm. (10 Marks) $1
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