The firm has determined its optimal capital structure, which is composed of the following sources and target market value proportions:
Source of Capital Target Market Proportions
Long-term debt. 30%
Preferred Stock 15%
Common Stock 55%
Debt: The firm can sell a 20-year, $1,000 par value, 7 percent bond for $990. A flotation cost of 2 percent of the face value would be required in addition to the discount of $10.
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 flotation cost stock is $7 per share.
Common Stock: The firm's common stock is currently selling for $50 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. a new common stock issue must be underpriced at $1 per share and the firm must pay $3 per share in flotation costs.
The firm pays 20 percent taxes on ordinary income and capital gains. Sanad invests $7,000 in NWC that will be recovered at the final year of the project.
