Question 3 (10 points)

A firm has determined its optimal structure which is composed of the following sources and target market value proportions, long-term debt 55% and common stock equity 45%.

Debt: The firm can sell a 13-year, $1,000 par value, 10 percent bond for $1,040. A flotation cost of 2 percent of the face value would be required. Additionally, the firm has a marginal tax rate of 40 percent.

Common Stock: the firms common stock is currently selling for $85 per share. The firm expects to pay cash dividends of $4.23 per share next year. The dividends paid on the outstanding stock over the past 6 years (20102015) were as follows:

Year	Dividend
2015	3.99
2014	3.84
2013	3.70
2012	3.42
2011	3.12
2010	2.98

The stock must be underpriced by $3 per share, and the flotation costs are expected to amount to $2 per share.

Calculate the weighted average cost of capital up to the point when retained earnings are exhausted?