Northwest Utility Company faces increasing needs for capital. Fortunately, it ha

Question

Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 30 percent. Northwests treasurer is trying to determine the corporations current weighted average cost of capital in order to assess the profitability of capital budgeting projects. Historically, the corporations earnings and dividends per share have increased about 9.2 percent annually and this should continue in the future. Northwests common stock is selling at $65 per share, and the company will pay a $7.50 per share dividend (D1). The companys $98 preferred stock has been yielding 9 percent in the current market. Flotation costs for the company have been estimated by its investment banker to be $5.00 for preferred stock. The companys optimum capital structure is 60 percent debt, 10 percent preferred stock, and 30 percent common equity in the form of retained earnings. Refer to the table below on bond issues for comparative yields on bonds of equal risk to Northwest.

Explanation / Answer

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