Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa$3$ credit rating. The corporate tax rate is $40$ 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$$s earnings and dividends per share have increased about $7\mathrm{.}2$ percent annually and this should continue in the future. Northwest$$s common stock is selling at $$62$ per share, and the company will pay a $$2\mathrm{.}50$ per share dividend $($D$1)(1).$

The company$$s $$92$ 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 $$4\mathrm{.}00$ for preferred stock.

The company$$s optimum capital structure is $30$ percent debt, $20$ 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.