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

Answer

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The company's $110 preferred stock has been yielding 8 percent in the current market. Flotation costs for the company have been estimated by its investments banker to be $6 preferred stock.

The company 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 yield on bonds of equal risk to Northwest.