Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 40 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 7.3 percent annually and this should continue in the future. Northwest's common stock is selling at $79 per share, and the company will pay a $6.30 per share dividend (D). The company's $126 preferred stock has been yielding 4 percent in the current market. Flotatica.costs for the company have been estimated by its jovestment banker to be $3.00 for preferred stock. The company's optimum capital structure is 55 percent debt, 10 percent preferred stock, and 35 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 Moody's Yield to Maturity Issue Rating Price Utilities: Southwest electric power-7 1/4 2023 970.18 8.56 Pacific bell7 3/8 2025 906.25 8.53 Pennsylvania power & light8 172 2022 965.66 8.45 Industrials: Johnson & Johnson6 3/4 2023 860.24 8.57 Dillard's Department Stores-7 1/8 2023 930.92 8.44 Marriott Corp-10 2015 1,110.10 9.66 a. Compute the cost of debt, K. (Use the accompanying table-relate to the utility bond credit rating for yield.) Cost of debt Cost of preferred stock b. Compute the cost of preferred stock, Ke c. Compute the cost of common equity in the form of retained earnings, Ke Cost of common equity d. Calculate the weighted cost of each source of capital and the weighted average cost of capital Weighted Cost Debt Preferred stock Common equity Weighted average cost of capital