Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 35 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 6.8 percent annually and this should continue in the future. Northwests common stock is selling at $84 per share, and the company will pay a $6.40 per share dividend (D1). The companys $136 preferred stock has been yielding 9 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 optimal 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: Southwest electric power7 1/4 2023 Aa2 $ 995.18 8.74 % Pacific bell7 3/8 2025 Aa3 911.25 9.22 Pennsylvania power & light8 1/2 2022 A2 990.66 8.99 Industrials: Johnson & Johnson6 3/4 2023 Aaa 910.24 8.33 % Dillards Department Stores7 3/8 2023 A2 980.92 8.66 Marriott Corp.10 2015 B2 1,135.10 9.55

a. Compute the cost of debt, Kd (use the accompanying tablerelate 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, Kp. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

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.)

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.)

Clear chart:

Data on Bond IssuesIssueMoodys Rating PriceYield to MaturityUtilities:

Southwest electric power7 1/4 2023Aa2$995.18 8.74%

Pacific bell7 3/8 2025Aa3 911.25 9.22

Pennsylvania power & light8 1/2 2022A2 990.66 8.99

Industrials:

Johnson & Johnson6 3/4 2023Aaa 910.24 8.33%

Dillards Department Stores7 3/8 2023A2 980.92 8.66

Marriott Corp.10 2015B2 1,135.10 9.55