Old Exam Questions - Cost of Capital Page 20 of 27 Pages expected to continue to grow at 6 percent per year, next year’s dividend (D1) is forecasted to be $2.45, and the firm faces a 40 percent tax rate. Given this information, determine the size of the firm’s optimal capital budget. A. $1,250,000 B. $ 300,000 C. $1,625,000 D. $ 850,000 E. $1,950,000 38. An analyst has collected the following information regarding your company: •The company’s capital structure is 75 percent equity, 25 percent debt. •The before-tax yield to maturity on the company’s bonds is 8 percent and the bonds are selling at par value. •The company’s dividend next year is forecasted to be $1.25 a share. •The company expects that its dividend will grow at a constant rate of 6 percent a year. •The company’s stock price is $20. •The company’s tax rate is 40 percent. •The company anticipates that it will need to raise new common stock this year. Its investment bankers anticipate that the total flotation cost will equal 12.5
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