Austen Sensibles Ltd. has the following capital structure, which it expects to maintain into the foreseeable future:

Question:

Austen Sensibles Ltd. has the following capital structure, which it expects to maintain into the foreseeable future:
Debt. ......... . ......................35%
Preferreds ......... . .............10%
Common stock ........ . ... ...35%
Retained earnings ........... .20%

Current yields on similar risk bonds are ll percent. Flotation costs would be negligible and can be ignored for calculation purposes. New preferred shares are presently being considered and are expected to be offered at $100.00 with a dividend of 8 percent. Flotation costs would be 5 percent.

Austen has a beta of 0.9. Currently, Treasury bills are yielding 8.5 percent for one year, and the market portfolio (the S&P /TSX Composite Index) is expected to yield 16 percent over the next year.
Austen has a tax rate of 44 percent and expects internally generated funds to be sufficient to fund new investments.
Calculate the cost of capital of Austen Sensibles Ltd.

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