Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 40 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 8.6 percent annually and this should continue in the future. Northwests common stock is selling at $70 per share, and the company will pay a $7.20 per share dividend (D₁).

The companys $108 preferred stock has been yielding 7 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 45 percent debt, 20 percent preferred stock, and 35 percent common equity in the form of retained earnings. Refer to the table below 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:
Southwest electric power71/4 2023	Aa2	$	925.18		8.77	%
Pacific bell73/8 2025	Aa3		897.25		8.55
Pennsylvania power & light81/2 2022	A2		955.66		8.55
Industrials:
Johnson & Johnson63/4 2023	Aaa		860.24		8.45	%
Dillards Department Stores71/8 2023	A2		920.92		9.00
Marriott Corp.10 2015	B2		1,065.10		9.66

(a)	Compute the cost of debt, Kd (use the accompanying tablerelate to the utility bond credit rating for yield.) (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Cost of debt

%

(b)	Compute the cost of preferred stock, Kp. (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Cost of preferred stock

%

(c)	Compute the cost of common equity in the form of retained earnings, Ke. (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Cost of common equity

%

(d)	Compute the weighted average cost of capital. (Round your intermediate and final answers to 2 decimal places. Omit the "%" sign in your response.)

	Weighted cost
Debt (Kd)	%
Preferred stock (Kp)
Common equity (Ke)
Weighted average cost of capital (Ka)	%