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The company currently has an outstanding bond with a 8 . 6 percent coupon rate and another bond with a 6 . 2 percent rate.

The company currently has an outstanding bond with a 8.6 percent coupon rate and another bond with a 6.2 percent rate. The firm
has been informed by its investment dealer that bonds of equal risk and credit ratings are now selling to yield 9.5 percent. The
common stock has a price of $98.64 and an expected dividend (D1) of $3.35 per share. The historical growth pattern (g) for
dividends is as follows:
$2.20
2.44
2.71
3.01
The preferred stock is selling at $90 per share and pays a dividend of $8.50 per share. The corporate tax rate is 30 percent. The
flotation cost is 2.2 percent of the selling price for preferred stock. The optimum capital structure for the firm is 10 percent debt, 10
percent preferred stock, and 80 percent common equity in the form of retained earnings.
a. Compute the historical growth rate. (Do not round intermediate calculations. Round the final to 2 decimal places.)
Growth rate
%
b. Compute the cost of capital for the individual components in the capital structure. (Do not round intermediate calculations. Round
the final answers to 2 decimal places.)
c. Calculate the weighted cost of each source of capital and the weighted average cost of capital. (Do not round intermediate
calculations. Round the final answers to 2 decimal places.)
Debt (Kd)
Weighted Cost
Preferred stock (Kp)
Common equity (Ke)
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