Northwest Utility Company faces increasing needs for capital Fortunately, it has an Aa3 credit rating The corporate tax rate is 30 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 6 percent annually and this should continue in the future Northwests common stock is selling at $71 per share, and the company will pay a $8 20 per share dividend (D1)(1) The companys $110 preferred stock has been yielding 8 percent in the current market Flotation costs for the company have been estimated by its investment banker to be $6 00 for preferred stock The companys optimum capital structure is 50 percent debt, 25 percent preferred stock, and 25 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 $ 930 18 8 88 Southwest Bell7 3 8 2035 Aa3 898 25 8 66 Virginia Power Light8 1 2 2032 A2 960 66 8 66 Industrials Issac Johnson6 3 4 2033 Aaa 870 24 8 55 Wholesale Department Stores7 1 8 2033 A2 930 92 8 45 Hotel Corporation10 2035 B2 1,070 10 9 77 Compute the cost of debt, Kd 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

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Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 30 percent. Northwests treasurer is

Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 30 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 9.6 percent annually and this should continue in the future. Northwests common stock is selling at $71 per share, and the company will pay a $8.20 per share dividend (D1)(1) .

The companys $110 preferred stock has been yielding 8 percent in the current market. Flotation costs for the company have been estimated by its investment banker to be $6.00 for preferred stock.

The companys optimum capital structure is 50 percent debt, 25 percent preferred stock, and 25 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	$ 930.18	8.88%
Southwest Bell7 3/8 2035	Aa3	898.25	8.66
Virginia Power & Light8 1/2 2032	A2	960.66	8.66
Industrials:
Issac & Johnson6 3/4 2033	Aaa	870.24	8.55%
Wholesale Department Stores7 1/8 2033	A2	930.92	8.45
Hotel Corporation10 2035	B2	1,070.10	9.77