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 Aa3 credit rating. The corporate tax rate is 35 percent. Northwest's treasurer is

image text in transcribedimage text in transcribed

Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 35 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 5.6 percent annually and this should continue in the future. Northwest's common stock is selling at $66 per share, and the company will pay a $8.50 per share dividend (D1). The company's $100 preferred stock has been yielding 10 percent in the current market. Flotation costs for the company have been estimated by its investment banker to be $4.00 for preferred stock. The company's optimum capital structure is 35 percent debt, 15 percent preferred stock, and 50 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, 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.) Answer is complete but not entirely correct. b. Compute the cost of preferred stock, Kp. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Answer is complete and correct. Cost of preferred stock 10.42 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.) Answer is complete but not entirely correct. 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.)

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

International Trade Finance

Authors: Tarsem Bhogal, Arun Trivedi

2nd Edition

303024542X, 9783030245429

More Books

Students also viewed these Finance questions