Western Electric Utility Company faces increasing needs for capital. Fortunately, it has an A $($low$)$ credit rating. The corporate tax rate is $30$ percent. Western$$s treasurer is trying to determine the corporation$$s current weighted average cost of capital to assess the profitability of capital budgeting projects. Historically, the corporation$$s earnings and dividends per share have increased at about a $9\mathrm{.}6$ percent annual rate.

Western Electric$$s common stock is selling at $$71$ per share, and the company will pay a $$8\mathrm{.}20$ per share dividend $($D$1).$ The company$$s $$110$ preferred stock has been yielding $8$ percent in the current market. Flotation costs for the company have been estimated by its investment dealer to be $$6\mathrm{.}00$ for preferred stock. The company$$s optimum capital structure is $50$ percent debt, $25$ percent preferred stock, and $25$ percent common equity in the form of retained earnings. Refer to the table below on bond issues for comparative yields on bonds of equal risks to Western Electric, maturing in $2038.$

Data on Bond Issues

Issue

Rating Price Yield

to

Maturity

Utilities:

Valnet $6\mathrm{.}172037$ BBB $($high$)99\mathrm{.}586\mathrm{.}71$

Transcanada $6\mathrm{.}652038$ A $($low$)103\mathrm{.}764\mathrm{.}43$

West Coast Energy $6\mathrm{.}032039$ A $($high$)100\mathrm{.}146\mathrm{.}88$

Industrials:

Manulife Financial $5\mathrm{.}902036$ BBB $99\mathrm{.}846\mathrm{.}60$

Dillard's Departmental Store $5\mathrm{.}392037$ A$($low$)96\mathrm{.}016\mathrm{.}93$

a$.$ Compute the cost of debt, Kd$.($Input your answer as a percent rounded to $2$ decimal places.$)$

Cost of debt

$\%$

b$.$ Compute the cost of preferred stock, Kp$.($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 retained earnings, Ke$.($Input your answer as a percent rounded to $2$ decimal places.$)$

Cost of common equity

$\%$

d$.$ Compute the weighted average cost of capital. $($Input your answer as a percent rounded to $2$ decimal places.$)$

Weighted Cost

Debt $($Kd$)$

$\%$

Preferred stock $($Kp$)$

$\%$

Common equity $($Ke$)$

$\%$

Weighted average cost of capital $($Ka$)$

$\%$