According to the perfect markets approach to dividend policy,
A) the firm should retain earnings so stockholders will receive a capital gain.
B) the firm should pay a dividend only after current equity financing needs have been met.
C) the price of a share of stock is unrelated to dividend policy.
D) other things equal, the greater the payout ratio, the greater the share price of the firm.
Question 2
A corporate bond has a face value of 1,000 and a coupon rate of 5. The bond matures in 15 years
and has a current market price of 925. If the corporation sells more bonds, it will incur flotation
costs of 25 per bond.
If the corporate tax rate is 35, what is the after-tax cost of debt capital?
A) 3.74 B) 5.29 C) 6.78 D) 4.45
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