3. Very Busy Airlines has the following capital structure:

Debt $50,000,000

Preferred Stock $10,000,000

Common Stock $40,000,000

Additional info:

Yield to maturity (bonds) 10%

Price of preferred stock $50

Price of common stock $35

Preferred dividend $8

Common dividend $3

Flotation cost, common $5

Growth rate of dividends 5%

The firms tax rate is 20%. Compute the firms weighted average cost of capital [WACC]. (10)

[Hint: First compute weights for debt, preferred stock, and common stock in the capital structure. Then compute their respective component costs. Finally compute the WACC].