Cost of capital Baffer Company has outstanding $800,000 face value of 14 percent 20-year bonds which trade in the bond market at par. The remainder of its long-term debt consists of $400,000 of 12 percent mortgages whose face value is considered to be fair value. It has outstanding 10,000 shares of $100 par $7 preferred stock which trades in the market at $70 per share. Also outstanding are 10,000 shares of common stock with a market price of $40 per share. The company pays a cash dividend of $3.20 on the common shares. The retained earnings balance is $900,000. The company is subject to a 40 percent income tax rate.

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REQUIRED Compute the weighted-average cost of capital.