Answer Happy

A-Rod Manufacturing Company is trying to calculate its cost of
capital for use in making a capital budgeting decision. Mr. Jeter,
the vice-president of finance, has given you the following
information and has asked you to compute the weighted average cost
of capital.
The company currently has outstanding a bond with a 10.4 percent
coupon rate and another bond with an 8.0 percent rate. The firm has
been informed by its investment banker that bonds of equal risk and
credit rating are now selling to yield 11.3 percent. The common
stock has a price of $58 and an expected dividend
(D1) of $1.78 per share. The historical growth
pattern (g) for dividends is as follows:
The preferred stock is selling at $78 per share and pays a dividend
of $7.40 per share. The corporate tax rate is 30 percent. The
flotation cost is 2.5 percent of the selling price for preferred
stock. The optimum capital structure for the firm is 30 percent
debt, 10 percent preferred stock, and 60 percent common equity in
the form of retained earnings.
a. Compute the average historical growth
rate. (Do not round intermediate calculations. Round
your answer to the nearest whole percent and use this value
as g. Input your answer as a whole
percent.)
b. Compute the cost of capital for the
individual components in the capital structure. (Use
the rounded whole percent computed in part a for g.
Do not round any other intermediate calculations. Input your
answers as a percent rounded to 2 decimal places.)
c. 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.)