P17.10 Cost of Capital. Eureka Membership Warehouse, Inc., is a rapidly growing chain of retail outlets offering brand-name merchandise at discount prices. A security analyst's report issued by a national brokerage firm indicates that debt yielding 13 per cent composes 25 per cent of Eureka's overall capital structure. Furthermore, both earnings and dividends are expected to grow at a rate of 15 per cent per year.

Currently, common stock in the company is priced at $30, and it should pay $1.50 per share in dividends during the coming year. This yield compares favorably with the 8 per cent return currently available on risk-free securities and the 14 per cent average for all common stocks, given the company's estimated beta of 2