The Manx Company was recently formed to manufacture a new product. It has the following capital structure in market value terms:
Debentures……………………………….$ 6,000,000
Preferred stock…………………………… 2,000,000
Common stock (320,000 shares)…………. 8,000,000
$16,000,000
The company has a marginal tax rate of 40 percent. A study of publicly held companies in this line of business suggests that the required return on equity is about 17 percent. (The CAPM approach was used to determine the required rate of return.) The Manx Company's debt is currently yielding 13 percent, and its preferred stock is yielding 12 percent. Compute the firm's present weighted average cost of capital.