Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa 3 credit rating. The corporate tax rate is 3 0 percent. Northwest

Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 30 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 8.3 percent annually and this should continue in the future. Northwests common stock is selling at $80 per share, and the company will pay a $7.30 per share dividend (D1)
.
The companys $128 preferred stock has been yielding 5 percent in the current market. Flotation costs for the company have been estimated by its investment banker to be $5.00 for preferred stock.
The companys optimum capital structure is 40 percent debt, 15 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
Issue Moodys Rating Price Yield to Maturity
Utilities:
Pacific Electric Power 71/42033 Aa2 $ 975.188.34%
Southwest Bell73/82035 Aa3907.258.63
Virginia Power & Light81/22032 A2970.668.55
Industrials:
Issac & Johnson63/42033 Aaa 870.248.66%
Wholesale Department Stores71/82033 A2940.928.33
Hotel Corporation102035 B21,115.109.55
Compute the cost of debt, Kd
Compute the cost of preferred stock, Kp
Compute the cost of common equity in the form of retained earnings, Ke
calculations. Input your answers as a percent rounded to 2 decimal places.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Fundamentals Of Institutional Asset Management

Authors: Frank J Fabozzi, Francesco A Fabozzi

1st Edition

9811220034, 9789811220036

More Books

Students also viewed these Finance questions

Question

Graph function in problem 10 2x if 0 x 20 400.5x ifx 20 h(x)

Answered: 1 week ago

Question

How is the NDAA used to shape defense policies indirectly?

Answered: 1 week ago