WEIGHTED AVERAGE COST OF CAPITAL P&G. Peafiel and Godoy have an optimal capital structure that consists of 25% debt and 75% common equity. They expect to have $12,000,000 of new retained earnings available for investment for the next year.

BONDS. Their investment bankers assure them that they could issue $8,000,000 (net of flotation costs) of bonds carrying a 12% coupon rate, paying semiannual interest, having a 10-year maturity, at a price of $1,050. Flotation costs for this issue would be $50 per bond. Beyond $8,000,000 the flotation costs are $100 per bond.

COMMON STOCK. The current stock price is $50. The expected dividend is $7.50. Dividends are expected to grow at a rate of 9%, forever. New shares of stock can be issued at $50 per share and flotation costs would be $4 per share. Peafiel and Godoy have a corporate tax rate of 30%.

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