24. McNabb Construction Company is trying to calculate its cost of capital for use in making a capital budgeting decision. Mr. Reid, the vice president of finance, has given you the following information and has asked you to compute the weighted average cost of capital.

The company currently has a bond outstanding with a 9.5 percent coupon rate and another bond with a 7.8 percent rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 10.5 percent. The common stock has a price of $98.44 and an expected dividend (Dj) of $3.15 per share. The historical growth pattern (g) for dividends is as follows.

$2.00 2.24 2.51 2.81 Compute the historical growth rate, round it to the nearest whole number, and use it for g.

The preferred stock is selling at $90 per share and pays a dividend of $8.50 per share. The corporate tax rate is 30 percent. The flotation cost is 2 percent of the selling price for preferred stock. The optimum capital structure for the firm is 30 percent debt, 10 percent preferred stock, and 60 percent common equity in the form of retained earnings.

Compute the cost of capital for the individual components in the capital structure, and then calculate the weighted average cost of capital (similar to Table 11-1 on page 332).