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ABC fimm has determined its optimal capital structure, which is composed of the following sources and target market value proportions: Target Market Source of Capital Proportions Long-term debt 40% Preferred stock 5 Common stock equity 55 Debt: The firm can sell a 20-year, S1,000 par value, 8 percent bond for S980. A flotation 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 $75 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 $50 per share. The dividend expected to be paid at the end of the coming year is $5.00 Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.15. It is expected that to sell, a new common stock issue must be underpriced at $1 per share and the firm must pay S1 per share in flotation costs. Additionally, the firm's marginal tax rate is 40 percent. Calculate: a. Cost of debt b. Cost of preferred Stock e. Cost of Common Stock Equity d. Calculate the firm's weighted average cost of capital assuming the firm has exhausted all retained earnings. Question No 2 (2 marks) : XYZ corporation is considering a capital project for the coming year. The project has an internal rate of return of 14 percent. If the firm has the following target capital structure and costs, what should their decision be and why? Source of Capital Proportion After-Tax Cost Long-term debt 0.40 10% 15% 0.10 Preferred stock Common stock equity 0.50 20%

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