a)

b), c)

d)

10 point 1 Check my work Northwest Utility Company faces increasing needs for capital. Fortunately, it has an A3 credit rating. The corporate tax rate is 30 percent. Northwest's treasurer is trying to determine the corporation's current weighted average cost of capital in order to assess the profitability of capital budgeting projects Historically, the corporation's earnings and dividends per share have increased about 5.3 percent annually and this should continue in the future. Northwest's common stock is selling at $77 per share, and the company will pay a $4.30 per share dividend (D) The company's $122 preferred stock has been yielding 6 percent in the current market Flotation costs for the company have been estimated by its investment banker to be $5.00 for preferred stock The company's optimum capital structure is 45 percent debt. 10 percent preferred stock, and 45 percent common equity in the form of retained earnings. Refer to the following table on bond issues for comparative yields on bonds of equal risk to Northwest Data on Bond Issues Moody's Yield to Issue Rating Price Maturity Utilities: Southwest electric power-7 1/4 2023 Aa2 $ 960.18 8.341 Pacific bell-7 378 2025 AaB 904.25 8.23 Pennsylvania power & light-8 1/2 2022 A2 990.66 8.99 Industrials: Johnson & Johnson 3/4 2023 Aaa 840.24 3.445 Dillard's Department Stores-7 1/8 2023 A2 990.92 8.55 Marriott Corp. 10 2015 B2 1,100.10 9.77 a. Compute the cost of debt. K. (Use the accompanying table-relate to the utility bond credit rating for yield.) (Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Cost of debt Graw Hill Chapter 11 HW Helen Save & alt Check my work 4. 10 b. Compute the cost of preferred stock. kp (Do not found intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) come el protoned wek c. Compute the cost of common equity in the form of retained earnings, Ke (Do not round Intermediate calculations, Input your answer as a percent rounded to 2 decimal places) Coul of common equity d. Calculate the weighted cost of each source of capital and the weighted average cost of capital (Do not round Intermediate calculations. Input your answers as a percent rounded to 2 decimal places) ME Grow rences d. Calculate the weighted cost of each source of capital and the weighted average cost of capital. (Do not round Intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt Preferred stock Common equity Weighted average cost of capital 0.00%