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Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa 3 credit rating. The corporate tax rate is 4 0 percent. Northwest's
Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa credit rating. The corporate tax rate is percent. Northwest's treasurer is trying to determine the corporation's current weighted average cost of capital in order to assess the profitability of capital budgeting projects.
Historically, the corporation's earnings and dividends per share have increased about percent annually and this should continue in the future. Northwest's common stock is selling at $ per share, and the company will pay a $ per share dividend
The company's $ preferred stock has been yielding percent in the current market. Flotation costs for the company have been estimated by its investment banker to be $ for preferred stock.
The company's optimum capital structure is percent debt, percent preferred stock, and 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.
a Compute the cost of debt,
Note: Do not round intermediate calculations. Input your answer as a percent rounded to decimal places.
tableCost of debt,
b Compute the cost of preferred stock, Kp
c Compute the cost of common equity in the form of retained earnings, Ke
d Calculate the weighted cost of each source of capital and the weighted average cost of capital.
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