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The Following Information Pertains to the Capital Program of a Firm

Question 12

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The following information pertains to the capital program of a firm:
Target capital structure : 30% debt, 20% preferred stock, 50% equity.
Unadjusted component costs of capital kd = 10%
kp = 12%
ke = 14%
Flotation Costs, Taxes, and Retained Earnings Flotation costs are 8% on common and preferred stock and zero on debt
The total effective tax rate (federal and state)is 40%
Retained earnings of $1,250,000 are expected next year.
Investment Opportunities
The following information pertains to the capital program of a firm: Target capital structure : 30% debt, 20% preferred stock, 50% equity. Unadjusted component costs of capital k<sub>d</sub> = 10% k<sub>p</sub> = 12% k<sub>e</sub> = 14% Flotation Costs, Taxes, and Retained Earnings Flotation costs are 8% on common and preferred stock and zero on debt The total effective tax rate (federal and state)is 40% Retained earnings of $1,250,000 are expected next year. Investment Opportunities The following information pertains to the capital program of a firm: Target capital structure : 30% debt, 20% preferred stock, 50% equity. Unadjusted component costs of capital k<sub>d</sub> = 10% k<sub>p</sub> = 12% k<sub>e</sub> = 14% Flotation Costs, Taxes, and Retained Earnings Flotation costs are 8% on common and preferred stock and zero on debt The total effective tax rate (federal and state)is 40% Retained earnings of $1,250,000 are expected next year. Investment Opportunities

Correct Answer:

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a. Cost of debt = kd(1-T) = 10(.6) = 6.0%...

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