6. The Kalog Precision Tool Company was recently formed to manufacture a new product. The company has the following capital structure in market value terms:

13% debentures of 2005 $ 6,000,000 12% preferred stock 2,000,000 Common stock (320,000 shares) 8,000,000 Total $16,000,000 234 Part I1 Investment in Assets and Required Returns The common stock sells for $25 a share, and the company has a marginal tax rate of 40 percent. A study of publicly held companies in this line of business suggests that the required return on equity is about 17 percent for a company of this sort.