FARHA NADIA (J15019891)
DB 8
EXAMPLE
• ABC Company has determined its optimal capital structure which is composed of the
long-term debt and common stock equity and their target market proportions are 30%
and 70% respectively.
• The firm can sell a 10-year, RM1,000 par value, 6 percent bond for RM1,040. A
flotation cost of 2 percent of the face value would be required in addition to the
premium of RM40.
• Common stock is currently quoted at RM10 per share. The dividend in one-year time
from now is RM0.20. Its dividend payments have been growing at a constant rate for
the last three years. The dividend was RM0.15 three years ago. It is expected that to
sell, a new common stock issue must be underpriced RM2 per share and the firm must
pay RM1 per share in flotation costs.
