You have been hired by the Board of Directors of firm XYZ as a part of a team, tasked with the valuation of a potential acquisition target. You have collected the following publicity available information about the target company:

1)The common stock of the company is currently selling for an average of $40 per share. There are 6.5 million shares outstanding. The annual dividend that the company just paid was $2.60 per share.

2) The company has two bond issues outstanding; both bonds pay interest annually. The 5.4 percent 20-year bond was issued 13 years ago and is currently selling at 98.3% of par. The 4 percent 15-year bond was issued 2 years ago. The 20-year issue has 80,000 bonds outstanding and the 15-year issue has 30,000 bonds outstanding.

You have estimated that:

1) The long-term growth rate of dividends should be 4.75 percent. The company's beta should be 1.03. The expected return of the market is 11.5 percent and the risk-free rate is 3.5 percent.

2) The market-required rate of return on the 15-year bond should be 6.1 percent.

What is your best estimate for the cost of capital of the acquisition target company?