Question

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 per share dividend (D) The company's $114 preferred stock has been yielding 10 percent in the current market. Flotation costs for the company have been estimated by its investment banker to be 58.00 for preferred stock The company's optimal capital structure is 60 percent debt, 25 percent preferred stock, and 15 percent common equity in the form of retained earnings. Refer to the following table on bondues for comparative yields on bonds of equal risk to Northwest Price Vad to Maturity Data on Bond Issues Moody's Issue Ubabes: Southwest electric power-7 1/4 2023 Pacific bell7 3/8 2026 Pennsylvania power & light-8 1/2 2022 Industrals Johnson & Johnson63/4 2023 Dad's Department Stores7 38 2023 Marriott Corp-10 2015 $ 940 18 900 25 97066 8.36% 888 8.88 8.00% 890.24 95062 1,080.10 32 a. Compute the cost of debt, ka (use the accompanying table places) to the utility bond credt rating for yield) (Do not round Intermediate calculations, Input your answer as a percent rounded to 2 decimal Cost of debt b. Compute the cost of preferred stock ky Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places) Cost of preferred stock %

Answer 1

9) since Norsthmust and same rating sa 3 Pacific st is Bil has considued lost of Debt = Yerled (1 - Tax rate) 0.88 ( 1- Tax rate) OOO CI- 40%) = 5.328 as 5.337.) b) Dividend = Price & Yeild = 114 x 10m = $11.4 Cost = Dividend Price - flotatom wst = 110.757 () lost of equity = Diuident + growth - = Pry 1 12.707 4.6 6 + 6.4% 73

Weight WARC (axb). 3.198 or 3.20 Debt 5033 600): 10.75 2.687572469 Deffered Equity 12.70 154 1.90560 1.90 7-79 woce. 7. 1947 WACC = 7o 797