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TRM Consulting Services currently has the following capital structure:
Source
Book Value
Quantity
Common Stock
$6,500,000
350,000
Preferred Stock
$375,000
7,500
Debt
$4,000,000
4,000
Debt is represented by 15-year original maturity bonds, issued five years ago, with a coupon rate of 8% and are currently selling for $965. The bonds pay interest semiannually. The preferred stock pays a $5 dividend annually and is currently valued at $60 per share. Flotation costs on debt and preferred equity are negligible and can be ignored, but they will be 8% of the selling price for common stock. The common stock, which can be bought for $32.00, has experienced a 5% annual growth rate in dividends and is expected to pay a $1.50 dividend next year. In addition, the firm expects to have $150,000 of retained earnings. Assume that TRM's marginal tax rate is 35%.
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