Northwest Utility Company faces increasing needs for capital.
Fortunately, it has an Aa3 credit rating. The corporate tax rate is
30 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 9.6 percent annually and this should continue
in the future. Northwest’s common stock is selling at $71 per
share, and the company will pay a $8.20 per share dividend
(D1).
The company’s $110 preferred stock has been yielding 8 percent in
the current market. Flotation costs for the company have been
estimated by its investment banker to be $6.00 for preferred
stock.
The company’s optimum capital structure is 50 percent debt, 25
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.
Data on Bond Issues | ||||||
Issue | Moody’s Rating |
Price | Yield to Maturity | |||
Utilities: | ||||||
Southwest electric power––7 1/4 2023 | Aa2 | $ | 930.18 | 8.88 | % | |
Pacific bell––7 3/8 2025 | Aa3 | 898.25 | 8.66 | |||
Pennsylvania power & light––8 1/2 2022 | A2 | 960.66 | 8.66 | |||
Industrials: | ||||||
Johnson & Johnson––6 3/4 2023 | Aaa | 870.24 | 8.55 | % | ||
Dillard’s Department Stores––7 1/8 2023 | A2 | 930.92 | 8.45 | |||
Marriott Corp.––10 2015 | B2 | 1,070.10 | 9.77 | |||
a. Compute the cost of debt,
Kd. (Use the accompanying table—relate to the
utility bond credit rating for yield.) (Do not round
intermediate calculations. Input your answer as a percent rounded
to 2 decimal places.)
b. Compute the cost of preferred stock,
Kp. (Do not round intermediate
calculations. Input your answer as a percent rounded to 2 decimal
places.)
Debt (After Tax cost)/Cost of Debt | ||||
Northwest has Aa3 credit ratings | ||||
Yield to maturity | 8.66% | |||
Market Value Weights | 0.50 | |||
Cost % | 6.06% | 8.66%(1-30%) | ||
Weighted Average Cost of Capital | 3.03% | |||
( Cost % X Market value weights) | ||||
Preferred Stock/Cost of Preferred Stock | ||||
Prefered Stock | 110 | |||
Yield | 8% | |||
Floataton Costs | 6 | |||
Cost % | 8.46% | (110 X 8%/(110-6) | ||
Market Value Weights | 0.25 | |||
Weighted Average Cost of Capital | 2.12% | |||
( Cost % X Market value weights) |
Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The...
Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 30 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 9.2 percent annually and this should continue in the future. Northwest’s common stock is selling at $65 per share, and the company will...
Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 30 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 7.6 percent annually and this should continue in the future. Northwest’s common stock is selling at $68 per share, and the company will...
Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 35 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 6.2 percent annually and this should continue in the future. Northwest’s common stock is selling at $63 per share, and the company will...
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 8.6 percent annually and this should continue in the future. Northwest’s common stock is selling at $70 per share, and the company will...
Northwest Utility Company faces increasing needs for capital, Fortunately, it has an Aa3 credit rating. The corporate tax rate is 35 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 4.6 percent annually and this should continue in the future. Northwest's common stock is selling at $69 per share, and the company will...
Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 35 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 9.3 percent annually and this should continue in the future. Northwest's common stock is selling at $81 per share, and the company will...
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 7.2 percent annually and this should continue in the future. Northwest's common stock is selling at $62 per share, and the company will...
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 proftability of capital budgeting projects. Historically, the corporation's eamings and dividends per share have increased about 7.2 percent annually and this should continue in the future. Northwest's common stock is selling at $62 per share, and the company will...
Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 35 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 6.2 percent annually and this should continue in the future. Northwest's common stock is selling at $60 per share, and the company will...
Northwest Utility Company faces increasing needs for capital. Fortunately, thas an A3 credit rating. The corporate tax rate is 40 percent. Northwes's treasure 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 earings and dividends per share have increased about 6.4 percent annualy and this should continue in the Mure. Northwest's common stock isseling at $73 pershare, and the company will pay a $4.50...