Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa$3$ 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$$s earnings and dividends per share have increased about $9\mathrm{.}2$ percent annually and this should continue in the future. Northwest$$s common stock is selling at $$65$ per share, and the company will pay a $$7\mathrm{.}50$ per share dividend $($D$1)$

$.$

The company$$s $$98$ 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 $$5\mathrm{.}00$ for preferred stock.

The company$$s optimum capital structure is $60$ percent debt, $10$ percent preferred stock, and $30$ 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.