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 6.6 percent annually and this should continue in the future. Northwest's common stock is selling at $67 per share, and the company will pay a $4.20 per share dividend (D). The company's $102 preferred stock has been yielding 4 percent in the current market. Flotation costs for the company have been estimated by its investment banker to be $3.00 for preferred stock. The company's optimum capital structure is 40 percent debt, 20 percent preferred stock, and 40 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 Price Data on Bond Issues Moody's Issue Rating Utilities: Southwest electric power --7 1/4 2023 Aa2 Pacific bell--7 3/8 2025 3 Pennsylvania power & light--8 1/2 2022 A2 Industrials: Johnson & Johnson--6 3/4 2023 Dillard's Department Stores--7 1/8 2023 A2 Marriott Corp.--10 2015 B2 910.1 894.2 985.6 830.2 998.9 1,050.1 a. Compute the cost of debt, Kd (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.) wests treasurer trying to determine the urrent weighted average cost of capital in order to fitability of capital budgeting projects. corporation's earnings and dividends per share 1 about 6.6 percent annually and this should future. Northwest's common stock is selling at $67 the company will pay a $4.20 per share dividend $ $102 preferred stock has been yielding 4 percent narket. Flotation costs for the company have been s investment banker to be $3.00 for preferred stock. s optimum capital structure is 40 percent debt, 20 red stock, and 40 percent common equity in the d earnings. Refer to the following table on bond parative yields on bonds of equal risk to Northwest Data on Bond Issues Moody's Rating Yield to Maturity Price electric power--7 1/4 2023 11--7 3/8 2025 sia power & light--8 1/2 2022 Aa2 Aa3 A2 $ 910.18 894.25 985.66 8.44% 8.22 8.56 Johnson--6 3/4 2023 Department Stores--7 1/8 2023 Srp.--18 2015 A2 B2 830.24 998.92 1,050.10 8.46% 8.66 9.44 cost of debt, Ka (Use the accompanying table- Elity bond credit rating for yield.) (Do not round alculations. Input your answer as a percent decimal places.) b. Compute the cost of preferred stock, K. (Do not found intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Cost of preferred stock % 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 0.00%
