BearKat Enterprises

Suppose BearKat Enterprises wants to raise capital to build a factory to build chips in the U.S. The CEO asks you to calculate their weighted average cost of capital. She gives you these facts.

Tax rate = 23.4%.

15-year, 7.5% coupon, semiannual payment non-callable bonds sell for $1,010. Three year 6.0% coupon bonds sell for $1025. New bonds will be privately placed with no flotation cost.

12.75%, $100 par value, quarterly dividend, perpetual preferred stock sells for $185.50.

Common stock sells for $123.45. They pay a dividend of $2.12 and it has a growth rate of 4.82%.

BearKat enterprises stock has a Beta of .81. The risk free rate is 3.5% and the market risk premium is 6.12%. Management believes their stock has a risk premium over their bonds of 1.5%.

They currently obtain 40% of their capital from bonds, 20% from preferred stock and the rest from common equity. However, their target capital structure is 45% debt, 15% preferred stock and the remainder from common equity.

Using the information provided about BearKat Enterprises, what is BKE's weighted average cost of capital?

A. 4.39%

B. 5.17%

C. 6.77%

D. 7.11%