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 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 yields on bonds of equal risk to Northwest.

A.) Compute the cost of debt, K_d. (Use the accompanying tablerelate to the utility bond credit rating for yield.)

B.) Compute the cost of preferred stock, K_p

_C.) Compute the cost of common equity in the form of retained earnings, K_e

_D.) Calculate the weighted cost of each source of capital and the weighted average cost of capital.

	Weighted Cost
Debt %
Preferred Stock
Common Equity
Weighted average cost of capital %

Data on Bond Issues
Issue	Moodys Rating	Price	Yield to Maturity
Utilities:
Pacific Electric Power 7 1/4 2033	Aa2	$ 995.18	8.74%
Southwest Bell7 3/8 2035	Aa3	911.25	9.22
Virginia Power & Light8 1/2 2032	A2	990.66	8.99
Industrials:
Issac & Johnson6 3/4 2033	Aaa	910.24	8.33%
Wholesale Department Stores7 1/8 2033	A2	980.92	8.66
Hotel Corporation10 2035	B2	1,135.10	9.55