Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The...

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Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 40 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 7.8 percent annually and this should continue in the future. Northwest's common stock is selling at $85 per share, and the company will pay a $7.40 per share dividend (D1). The company's $138 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 $3.00 for preferred stock. The company's optimum capital structure is 55 percent debt, 20 percent preferred stock, and 25 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. Issue Utilities: Data on Bond Issues Moody's Rating Price Yield to Maturity Aa3 Aa2 $ 1,000.18 8.84% 912.25 8.33 995.66 9.00 920.24 8.44% 990.92 8.77 1,140.10 9.66 Pacific Electric Power --7 1/4 2033 Southwest Bell--7 3/8 2035 Virginia Power & Light--8 1/2 2032 Industrials: Issac & Johnson--6 3/4 2033 Wholesale Department Stores--7 1/8 2033 Hotel Corporation--10 2035 a. Compute the cost of debt. Kd. Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Cost of debt % b. Compute the cost of preferred stock, Kp. Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Cost of preferred stock % c. Compute the cost of common equity in the form of retained earnings. Ke- Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Cost of common equity % d. Calculate the weighted cost of each source of capital and the weighted average cost of capital. Note: Do not round Intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Debt Preferred stock Common equity Weighted Cost 96 Weighted average cost of capital 0.00 % Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 40 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 7.8 percent annually and this should continue in the future. Northwest's common stock is selling at $85 per share, and the company will pay a $7.40 per share dividend (D1). The company's $138 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 $3.00 for preferred stock. The company's optimum capital structure is 55 percent debt, 20 percent preferred stock, and 25 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. Issue Utilities: Data on Bond Issues Moody's Rating Price Yield to Maturity Aa3 Aa2 $ 1,000.18 8.84% 912.25 8.33 995.66 9.00 920.24 8.44% 990.92 8.77 1,140.10 9.66 Pacific Electric Power --7 1/4 2033 Southwest Bell--7 3/8 2035 Virginia Power & Light--8 1/2 2032 Industrials: Issac & Johnson--6 3/4 2033 Wholesale Department Stores--7 1/8 2033 Hotel Corporation--10 2035 a. Compute the cost of debt. Kd. Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Cost of debt % b. Compute the cost of preferred stock, Kp. Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Cost of preferred stock % c. Compute the cost of common equity in the form of retained earnings. Ke- Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Cost of common equity % d. Calculate the weighted cost of each source of capital and the weighted average cost of capital. Note: Do not round Intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Debt Preferred stock Common equity Weighted Cost 96 Weighted average cost of capital 0.00 %