BearKat wants to build a new assembly line to improve productivity. It is expected to generate a return of 17%. Sammy wants to know what he should use for his hurdle rate or WACC (weighted average cost of capital). Sammys accountant provides you with the following information. Common stock is selling for $73 a share. The current annual dividend is $2.36 and the growth rate is expected to be 2% a year. The stocks beta is 1.77. The preferred stock sells for $123 and pays an annual dividend of $25. There are currently 15 year callable, 3% coupon bonds available at a price of $988. The yield to maturity of these bonds is 3.1%. There are 20 year, non-callable 5% coupon bonds that pay annual payments and are available at a price of $1,080. The yield to maturity of these bonds is 4.39%. There are 5 year 7% coupon bonds that pay annual payments and are available at a price of $1,234. The yield to maturity of these bonds is 2.03%. The bond-yield risk premium is 2%. The current risk-free rate is .5% and the market risk premium is 4%. BearKat Autos has a target capital structure of 40% debt, 5% preferred stock and 55% common equity and their current tax rate is 25%.

When calculating the weighted average cost of capital, which bonds should we use for obtaining our cost of debt? (Instructor hint: we usually to use the yield to maturity on the longest term, non-callable bonds as a measure of (before tax) cost of debt. What is the (simple) average of the 3 above calculated costs of common equity values. Use this average as the eventual cost of common equity for Bearkat Autos.