Estimate Taylor's cost of capital or required rate of return. (You may use book values in your calculations. Assume the existing capital structure is optimal and ignore preferred stock. The relevant tax rate is 40 %.) 4. Preferred stock is a riskier investment than a bond. Yet companies have been known to issue preferred stock at a lower yield than they issue bonds. How can this be, assuming investors are rational?

5. (a) Estimate the cost of preferred stock (required return of preferred stock). (b) Redo question 3 including preferred stock as a financing source, and assume the target weights are as follows: notes, 5 %; bonds, 40%; preferred, 5%; equity, 50%