Bearcat Inc. has the following situation:

• The company has an outstanding bond issue with 9 years remaining to maturity. The bonds have a 8% coupon, and are trading at $1113. Interest is paid semi-annually.
• The company's common stock currently sells for $38 a share.
• The company's most recent dividend was $2.50 a share. Dividends are expected to grow at a constant rate of 3 percent per year.
• The company's tax rate is 40 percent.
• The company is targeting a debt-to-equity ratio of .9.
• Assume the company does not use short-term debt.

a. What is the company's weighted average cost of capital (WACC)?

b. Suppose that the common stock of Bearcat Inc. has a beta of 1.70. The risk-free rate of return is 4 percent and the market risk premium is .07. Using data from the first section of the problem, plus this new information, what is the new estimate of the cost of the common stock? (Note, you are not being asked to recalculate the WACC; only the cost of equity)

c. Continuing with the same problem, and using the cost of equity solved in the second section (the most complete equity pricing information possible, in other words), assume you learned that the firm now plans to offer preferred stock. The preferred stock of Bearcat Inc. pays an annual dividend of $7 and the preferred stock is selling for $80. Assume the long term sources of capital are now as follows:

debt $473,700

preferred $131,600

common $394,700

What is the capital structure weight for preferred stock?

What is the capital structure weight for common stock?

What is your new estimate of WACC?