Purchase Solution

Optimal Capital Structure for Target Market

Not what you're looking for?

Ask Custom Question

A firm has determined its optimal capital structure that is composed of the following sources and target market value proportions:

Source of Capital Target market proportions

Long-term debt 20%
Preferred debt 10%
Common stock equity 70%

Debt: The firm can sell a 12-year, $1,000 par value, 7% bond for $960. A flotation cost of 2% 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 %.

1) The firm's before-tax cost of debt is _________

7.7 %, 10.6 %, 11.2 %, or 12.7 %

2) The firm's after-tax cost of debt is ____________

3.25 %, 4.6 %, 8 %, or 8.13 %

Purchase this Solution

Solution Preview

The before tax cost of debt =coupon payment / Money realized on issue
Money realized on issue= issue price - ...

Purchase this Solution

Free BrainMass Quizzes
Academic Reading and Writing: Critical Thinking

Importance of Critical Thinking

Organizational Leadership Quiz

This quiz prepares a person to do well when it comes to studying organizational leadership in their studies.


This quiz will test your understanding of the SWOT analysis, including terms, concepts, uses, advantages, and process.

Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.