You are given the task of calculating the cost of capital of KaBoom Toy Company. The

company faces a tax rate of 40%. The company has 100,000 common shares and 10,000

preferred shares outstanding. Each preferred share has a par value of $60, and is currently priced

at 90% of the par value. The preferred shares are paying dividends that total 5% of the par value.

You estimate that the beta of the common stock is 1.5. The equity market risk premium is

estimated to be 5%, and the risk-free rate is 5%. The company has just paid a dividend of $2 per

share.

You expect that the dividends will grow at a rate of 15% until Year 4. After Year 4, the

dividends are expected to grow at a constant rate of 5% forever. You decide to employ the

CAPM approach to calculate the cost of equity.

The company has two different debt issues that are outstanding.

The first issue consists of 1,000

semi-annual coupon bonds. Each bond has a face value of $1,000. The annual coupon rate is

10%, and the bonds are currently trading at a YTM that equals 12%.

The bonds will mature 10

years from now.

The second issue consists of 1,000 zero coupon bonds. Each bond has a face

value of $1,000, and will mature 15 years from now. The zero coupon bonds are trading at 50%

of their face value.

Using the information provided above, calculate the weighted average cost of capital of KaBoom

Toy Company.