PI: GH Company's has raised its capital through bends, preferred stock and common stock. The state rate on bonds is 10% Lost of Capital Computation_-_20170719_101414 7 ml Company is subject to 40% income tax rate. The preferred stockholders have been promised with 16% dividends per year. The common stockholders desire minimum of 22% return on their investment Compute company's average cost of capital (which 3 becomes the company's desired rate of return on any investment), Hint: Interest paid on bonds is tax deductible and reduces the amount of taxes that must be paid. Thus the actual cost of 4 borrowing is less than the bonds coupon rate. It can be computed as follows Real effective cost of borrowing on bonds = Bond 5 6 Data: 7 Source of Capital Depreciation Rates B Bonds 1" year 26.25% $300,000 Preferred Stock year 22:1396 $200,000 10 Common Stock 3 year 16.52% $500,000 4 11 Stated Interest on Bond year 16. $296 10% 5 12 Stated Dividends Rate on Preferred Stock year 16.529. 16% 13 Desired Rtae of Return by Common Stockholders 6 year 2.06% 2296 Total 100% 14 Applicable Income Tax Rate 40% 15 16