Brooks Window Shielde, Inc. is trying to calculate its cost of capital
for use in a capital budgeting decision. Ms. Glass, the vice president
of finance, has given you the following information and has asked you
to compute weighted average cost of capital.
 

The company currently has outstanding a bond with an 11.2 percent
coupon rate and another bond with a 7.5 percent rate. The firm has
been informed by its investment banker that bonds of equal risk and
credit rating are now selling to yield 12.4 percent.

 

The common stock has a price of $54 and an expected dividend (Div1) of
$2.70 per share. The firm?s historical growth rate of earnings and
dividends per share has been 14.5 percent, but security analysts on
Wall Street expect this growth to slow to 12 percent in future years.

 

 

 

The preferred stock is selling at $50 per share and carries a dividend
of $4.75 per share. The corporate tax rate is 35 percent. The
flotation cost is 2.8 percent of the selling price for preferred
stock. The optimum capital structure for the firm seems to be 35
percent debt, 10 percent preferred stock, and 55 percent common equity
in the form of retained earnings.

 

Compute the cost of capital for the individual components in the
capital structure, and then calculate the weighted average cost of
capital.