A firm has determined its optimal capital structure, which is composed of the fo

Question

A firm has determined

its optimal capital structure, which is composed of the following sources and

target market value proportions.

Debt: The firm can sell a

12-year, $1,000 par value, 7 percent bond for $960. A flotation cost of 2

percent 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

Explanation / Answer

a. Debt: PV = 960

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