Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 40 percent. Northwests treasurer is

Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 40 percent. Northwests treasurer is trying to determine the corporations current weighted average cost of capital in order to assess the profitability of capital budgeting projects. Historically, the corporations earnings and dividends per share have increased about 9.4 percent annually and this should continue in the future. Northwests common stock is selling at $76 per share, and the company will pay a $9.60 per share dividend (D1) . The companys $120 preferred stock has been yielding 9 percent in the current market. Flotation costs for the company have been estimated by its investment banker to be $4.00 for preferred stock. The companys optimum capital structure is 40 percent debt, 20 percent preferred stock, and 40 percent common equity in the form of retained earnings. Refer to the following table on bond issues for comparative yields on bonds of equal risk to Northwest. Data on Bond Issues Issue Moodys Rating Price Yield to Maturity Utilities: Pacific Electric Power 7 1/4 2033 Aa2 $ 955.18 8.66% Southwest Bell7 3/8 2035 Aa3 903.25 8.33 Virginia Power & Light8 1/2 2032 A2 985.66 8.66 Industrials: Issac & Johnson6 3/4 2033 Aaa 830.24 8.34% Wholesale Department Stores7 1/8 2033 A2 980.92 8.90 Hotel Corporation10 2035 B2 1,095.10 9.66 Compute the cost of debt, Kd . (Use the accompanying tablerelate to the utility bond credit rating for yield.) Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Compute the cost of preferred stock, Kp . Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Compute the cost of common equity in the form of retained earnings, Ke . Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Calculate the weighted cost of each source of capital and the weighted average cost of capital. Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Routledge Handbook Of State Owned Enterprises

Authors: Luc Bernier, Massimo Florio, Philippe Bance

1st Edition

1138487694, 978-1138487697

More Books

Students also viewed these Finance questions