Problem 11-24 (Algo) Changes in costs and weighted average cost of capital [LO11-1] Brook's Window Shields Incorporated Is trying to calculate its cost of capital for use in a capital budgeting decision. Mr. Glass, the vice president of finance, has given you the following Information and has asked you to compute the weighted average cost of capltal. The company currently has outstanding a bond with a 11.5 percent coupon rate and another bond with a 8.4 percent coupon rate. The firm has been Informed by its Investment banker that bonds of equal risk and credit rating are now selling to yleld 12.5 percent. The common stock has a price of $84 and an expected dividend (D1) of $3.60 per share. The firm's historical growth rate of earnings and dividends per share has been 6.0 percent, but security analysts on Wall Street expect this growth to slow to 5 percent in future years. The preferred stock is selling at $80 per share and carrles a dividend of $6.20 per share. The corporate tax rate is 40 percent. The flotation cost is 3.8 percent of the selling price for preferred stock. The optimum capltal structure is 30 percent debt, 30 percent preferred stock, and 40 percent common equity In the form of retalned earnings. a. Compute the cost of capltal for the Individual components in the capltal structure. Note: Do not round Intermedlate calculations. Input your answers as a percent rounded to 2 decimal places. b. Calculate the weighted cost of each source of capital and the weighted average cost of capltal. Note: Do not round Intermedlate calculations. Input your answers as a percent rounded to 2 decimal places. Problem 11-26 (Algo) Impact of credit ratings on cost of capltal [LO11-3] Northwest Utility Compony foces incressing needs for capital. Fortunately, it has an A 3 credit rating. The corporate tox rate is 30 percent. Northwest's treasurer is trying to determine the corporation's current weighted aversge cost of capitsl in order to assess the profitsbility of capital budgeting projects. Historically, the corporation's earnings and dividends per share have increased about 7.4 percent annuslly and this should continue in the future. Northweat's common stock is selling at $74 per share, and the company will pay a $5.60 per share dividend (D1). The compony's $116 preferred stock hos been yielding 5 percent in the current morket. Flotetion costs for the compony hove been eatimated by its investment benker to be $2.00 for preferred stock. The compony's optimum capitsl structure is 30 percent debt, 10 percent preferred stock, and 60 percent common equity in the form of retained earnings. Refer to the following table on bond issues for comporative yields on bonds of equal risk to Northvest. a. Compute the cost of debt, Kd (Use the accomponying table-relate to the utility bond credit rating for yield.) Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. b. Compute the cost of preferred stock, Kp Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. c. Compute the cost of common equity in the form of retained earnings, Ke. Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. d. Colculate the weighted cost of each source of copitel and the weighted average cost of capital. Note: Do not round Intermedlate calculations. Input your answers as a percent rounded to 2 decimal places