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Unformatted text preview: inancing is, of course, 13.1%, which was computed in question 2a,
above. The cost of external equity financing would be slightly higher due to flotation costs.
b. Given that the firm can sell bonds priced to yield 13%, the aftertax cost of debt is 13% x (1 – .25)
c. This might throw the debt-equity mix out of proportion. Excessive use of debt might not only
increase the cost of debt financing, but all other sources of financing as well.
5. Mr. Autry’s comments strike at the heart of the residual dividend policy. That policy presumes that
the stockholders have no preferences about the form of repayment they receive from their
investment—only that the highest possible return be achieved. If, on the other hand, the stockholders
do have a preference, then the residual policy may not be the best. There is no hard and fast rule on
establishing whether or not the stockholders have a preference, or how strong it might be. Strong
cases can be argued for either point of view and the subject remains controversial. It does appear
from a study of Figure 2 that the managers of firms in the retailing business do believe that their
stockholders have a preference, and that preference is for curr...
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This note was uploaded on 12/21/2012 for the course FINC 309 taught by Professor Bunker during the Spring '12 term at Westminster UT.
- Spring '12
- Corporate Finance