Which is composed of sources and target market value

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Reference no: EM13335393

A firm has determined itsoptimal capital structure, which is composed of the following sources and target market value proportions:

Long-term debt 30%

Preferred stock 5

Common stock equit 65

Debt: The firm can sell a 20-year, $1000 par value, 9 percent bond for $980. A floatation cost of 2 percent of the face value would be required in addition to the discount of $20.

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 cost of issuing and selling the stock is $3 per share.

Common Stock: The firm's common stock is currently selling for $40 per share. The divident expected to be paid at the end of the coming year is $5.07. Its divident payments have been growing at a constant rate for the last five years. Five yars ago, the divident was $3.45. It is expected that to sell, a new common stock issue must be underpriced at $1 per share and the firm must pay $1 per share in flotation costs. Additionally, the firm's marginal tax rate is 40 percent.

Calculate the firm's weighted average cost of capital assuming the firm has exhausted all retained earnings.

Reference no: EM13335393

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