Problem 11-26 Impact of credit ratings on cost of capital (LO11-3] Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Ao credit rating. The corporate tax rate i 30 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 9.2 percent annually and this should continue in the future. Northwest's common stock is selling at $65 per share, and the company will pay o 5750 per share dividend to). The company's $98 preferred stock has been yielding 9 percent in the current market Flotation couts for the company nove been estimated by its investment banker to be $500 for preferred stock The company's optimum capital structure is 60 percent debt 10 percent preferred stock, and 30 percent common eguny in the form of retained earnings Refer to the following table on bond issues for comparative yields on bonds of equal risk to Northwest Duts on Bond Issues Moody's Yield to Issue Rating Price Maturity utilities Southwest electric po-7 1/4 2033 AZ $ 2001 0:54 Pacific bell-7 3/8 2025 5.33 Pennsylvants pour Slim 1/2 2022 975.66 Industriais Jonson Johnson-3/4 2032 . 890.24 0.24 Oilland's Department Stores-7 1/8 2023 A2 B2 Marriott Corp.--10 2015 1.640.0 9.66 892.25 Az 8.33 9.92 8.64 a. Compute the cost of debt. Kg (Use the accompanying table-relate to the utility bond credit rating for yield) (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Cost of debt b. Compute the cost of preferred stock, K (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places) Cost of preferred stock c. Compute the cost of common equity in the form of retainedomingske (Do not round Intermediate calculations. Input your answer is a percent rounded to 2 decimal places) Cort of common d. Calculate the weighted cost of each source of capital and the weighted average cost of capital (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt Preferred stock Common equity Weighted average cost of capital 0.00198 Problem 11-26 Impact of credit ratings on cost of capital (LO11-3] Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Ao credit rating. The corporate tax rate i 30 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 9.2 percent annually and this should continue in the future. Northwest's common stock is selling at $65 per share, and the company will pay o 5750 per share dividend to). The company's $98 preferred stock has been yielding 9 percent in the current market Flotation couts for the company nove been estimated by its investment banker to be $500 for preferred stock The company's optimum capital structure is 60 percent debt 10 percent preferred stock, and 30 percent common eguny in the form of retained earnings Refer to the following table on bond issues for comparative yields on bonds of equal risk to Northwest Duts on Bond Issues Moody's Yield to Issue Rating Price Maturity utilities Southwest electric po-7 1/4 2033 AZ $ 2001 0:54 Pacific bell-7 3/8 2025 5.33 Pennsylvants pour Slim 1/2 2022 975.66 Industriais Jonson Johnson-3/4 2032 . 890.24 0.24 Oilland's Department Stores-7 1/8 2023 A2 B2 Marriott Corp.--10 2015 1.640.0 9.66 892.25 Az 8.33 9.92 8.64 a. Compute the cost of debt. Kg (Use the accompanying table-relate to the utility bond credit rating for yield) (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Cost of debt b. Compute the cost of preferred stock, K (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places) Cost of preferred stock c. Compute the cost of common equity in the form of retainedomingske (Do not round Intermediate calculations. Input your answer is a percent rounded to 2 decimal places) Cort of common d. Calculate the weighted cost of each source of capital and the weighted average cost of capital (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt Preferred stock Common equity Weighted average cost of capital 0.00198
