Jenkins Resources, Inc., has the following capital structure:
Financing Source Proportion of Capital Structure
Debentures (9% coupon, $1,000 par value,
12 year maturity) .............. 27%
Preferred stock ($2 dividend, $25 par value) .... 8
Common equity .............. 65
Total ................. ... 100%
Jenkins expects to raise future capital in the proportions currently indicated on the balance sheet. The current market price for Jenkins debentures is $1,075. If new debentures were sold, the issuance cost would be $20 per bond. The current market price for the preferred stock is $19. Issuance costs on new preferred stock would be $1 per share for a $25 par value issue. Issuance costs on new equity would be $2.50 per share. The current market price for Jenkins common stock is $40. The stock pays a current (D0) dividend of $3. This dividend is expected to grow at an annual rate of 7 percent.
What is the weighted (marginal) cost of capital for Jenkins Resources, assuming new capital is raised in the proportions shown here and that all new equity comes from the sale of new shares, new debt comes from the sale of debentures, and new preferred comes from the sale of preferred stock? The firm’s marginal tax rate is 40 percent.