D6) T4-25. A firm has determined that its optimal capital structure would be composed of 20% in long-term debt, 10% in Preferred Stock, and 70% in Common Stock equity. The firm'smarginal tax rate is 21 percent. Compute the firm's weighted average cost of capital based on the following information. Note: Keep six-digitals after decimal points for all costcomponent calculations for a precise WACC estimation. Long-Term Debt: The firm can sell a 12-year, $1,000 par value, 7% annual coupon bond. A flotation cost of 2% of the face valueand a discount of $40 would be required to sell the bond. 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: The firm's common stock is currently valued at $110 per share. A new issue of stock isexpected to be sold with a $3 per share discount. Flotation costs are expected to be s2 per share. The most recent dividends were $5.25 per share. Its dividends are expected to growat a constant rate of 6% per year in the foreseeable future.Select one:O a. 9.98%O b. 10.18%O c. 10.30%O d. 10.51%

WACC: WACC also known as the company's average cost of capital. It is the sum of individual cost of…

Answered: percent. Compute the firm's weighted…

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percent. Compute the firm's weighted average cost of capital based on the following information.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Loanable Funds Theory

The loanable funds theory is a neoclassical theory that determines the interest rate where the demand for loanable investments and supply of loanable funds intersect. To determine the interest rate, this theory employs linear regression and a demand curve. At the equilibrium point, demand for borrowings and demand for the issuance of borrowing funds are inextricably linked. This point of equilibrium should equalize demand and the supply of money available for borrowing.

Question

D6)

T4-25. A firm has determined that its optimal capital structure would be composed of 20% in long-term debt, 10% in Preferred Stock, and 70% in Common Stock equity. The firm's
marginal tax rate is 21 percent. Compute the firm's weighted average cost of capital based on the following information. Note: Keep six-digitals after decimal points for all cost
component calculations for a precise WACC estimation. Long-Term Debt: The firm can sell a 12-year, $1,000 par value, 7% annual coupon bond. A flotation cost of 2% of the face value
and a discount of $40 would be required to sell the bond. 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: The firm's common stock is currently valued at $110 per share. A new issue of stock is
expected to be sold with a $3 per share discount. Flotation costs are expected to be s2 per share. The most recent dividends were $5.25 per share. Its dividends are expected to grow
at a constant rate of 6% per year in the foreseeable future.
Select one:
O a. 9.98%
O b. 10.18%
O c. 10.30%
O d. 10.51%

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