Samuel Company wants to compute a weighted-average cost of capital for use in evaluating capital expenditure proposals. Earnings, capital structure, and current market prices of the company's securities are:
Earnings:
Earnings before interest and income tax$ 210,000
Interest expense on bonds30,000
Pretax earnings$ 180,000
Income tax (45% tax rate)81,000
After-tax earnings$ 99,000
Preferred stock dividends24,000
Earnings available to common stockholders$ 75,000
Common stock dividends30,000
Increase in retained earnings$ 45,000
Capital structure:
Mortgage bonds, 10%, 10 years$ 300,000
Preferred stock, 12%, $100 par value100,000
Common stock, no par, 50,000 shares outstanding350,000
Retained earnings (equity of common stockholders)250,000
$1,000,000
Market prices of the company's stocks:
Preferred stock$ 96
Common stock 10
Required:
Assuming that the current cost and mix of sources of funds are expected to continue over the investment horizon, determine the weighted-average cost of capital.