PE and the company has decided to look seriously at a major expansion program proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Harry Davis' cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task: The firm's tax rate is 35%. The current price of Harry Davis' 12.5% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is S. Harry Davis does not use short-term interest- bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. . . Bond price DO The current price of the firm's 10%, $100 par value, quarterly dividend, perpetual preferred stock is S. Harry Davis would incur flotation costs equal to 6% of the proceeds on a new issue. Harry Davis' common stock is currently selling at $70 per share. Its last dividend (D0) was S, and dividends are expected to grow at a constant rate of 5.8% in the foreseeable future. Harry Davis' beta is 1.4, the yield on T-bonds is 5.6%, and the market risk premium is estimated to be 6%. For the own-bond-yield-plus-judgmental- risk-premium approach, the firm uses a 3.2% risk premium. Harry Davis' target capital structure is 30% long-term debt, 10% preferred stock, and 60% common equity. Group 1 Group 2 1155.70 Preferred 116.50 Stock price 2.88 1152.55 110.23 3.02 Group 3 1150.25 107.54 3.12 Group 4 1145.77 109.57 3.31 Group S 1158.36 118.11 3.22 Group 6 1122.65 113.15 3.40 Group 7 1105.67 114.27 3.29 b. What is the market interest rate on Harry Davis' debt, and what is the component cost of this debt for WACC purposes? c. (1) What is the firm's cost of preferred stock? (2) Harry Davis' preferred stock is riskier to investors than its debt, yet the preferred stock's yield to investors is lower than the yield to maturity on the debt. Does this suggest that you have made a mistake? (Hint: Think about taxes.) Explain