QUESTION 16

c) Pick Ltd has the following capital structure which is considered optimal.

Debt (par @$.100)

Prefered stock (par @$100)

Common stock (par @ $.100)

$.'000'

250,000

150,000

600,000

The investors of Pick ltd expect earnings and dividends to grow at a constant rate of 9% in the future. The company has just paid a dividend of $.3.6 per share and its stock currently sells at a price of $.60 per share. Treasury bonds yield 11% and the return on the market is 14%.Pick ltd beta is 1.51

New preferred stock can be sold at $.100per share with a dividend of sh.11 per share and flotation costs of $.5 per share.

The company's tax rate is 30%and it pays out all its earnings as dividend.12% debentures with a maturity of 10 years can be sold at $.92 per debenture

Required

The weighted average cost of capital (WACC) using market values