Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 30 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 53 percent annually and this should continue in the future Northwest's common stock is selling at $77 per share, and the company will pay a $4 30 per share dividend (D) The company's $122 preferred stock has been yielding 6 percent in the current market. Flotation costs for the company have been estimated by its investment banker to be $5.00 for preferred stock. D The company's optimum capital structure is 45 percent debt, 10 percent preferred stock, and 45 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 Tssue Batin Haturity Utilities: Southwest electric power-7 1/4 2023 Pacific bell-7 3/8 2025 Pennsylvania power & light--8 1/2 2022 Industrials: Johnson & Johnson -6 374 2023 Dillard's Department Stores --> 1/8 2023 Marriott Corp.--10 2015 Yield to Price Aa2 $960.18 904.25 990.66 8.30 8.25 8.99 A2 Ana A2 B2 340.24 990.92 1,100.10 8.45 8.55 9.77 o. Compute the cost of debt, ko (Use the accompanying table-relate to the utility bond credit rating for yield (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) b. Compute the cost of preferred stock, K, (Do not round intermediate calculations, Input your answer os a percent rounded to 2 decimal places.) Cestor preferred stock c. Compute the cost of common equity in the form of retained earnings, Ke (Do not round intermediate calculations, Input your answer as a percent rounded to 2 decimal places.) Cost or common equity d. Calculate the weighted cost of each source of capital and the weighted average cost of capital (Do not round Intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 30 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 53 percent annually and this should continue in the future Northwest's common stock is selling at $77 per share, and the company will pay a $4.30 per share dividend (0) The company's $122 preferred stock has been ylelding 6 percent in the current market. Flotation costs for the company have been estimated by its investment banker to be $500 for preferred stock The company's optimum capital structure is 45 percent debt, 10 percent preferred stock, and 45 percent common equity in the forme 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 Issue Rating Price Maturity Utilities: Southwest electric power-2 1/4 2023 Pacific bell -7 3/8 2025 Pennsylvania power & light - 1/2 2022 Industrials: Johnson & Johnson-6 3/4 2023 840.24 billard's Department Stores-7 1/8 2023 990.92 Marriott Corp.--18 2015 1,108,10 As2 Ana AZ 3960.18 904.25 990.66 8.34% 8.23 8.99 Ane A2 B2 8.443 8.55 9.77 c. Compute the cost of common equity in the form of retained earnings, K. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Cost of common equity d. Calculate the weighted cost of each source of capital and the weighted average cost of capital (Do not round Intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost % Debt Preferred stock Common equity Weighted average cost of capital 0.001%
