Question: A firm has the following balance-sheet figures:
Dect: 16% coupon, 15 years to maturity $35,000,000
Preferred shares: 13% dividend 15,000,000
Common stock: 4,000,000 shares at $5 each 20,000,000
Retained earnings 30,000,000
$100,000,000
The firm's tax rate is 40 percent. Interest on new 20-year debt would be II percent, and each $ 1,000 bond would net the firm $970. Preferred shares would be sold at par to provide a dividend yield of 8 percent, with after-tax issuing and underwriting expenses amounting to 4 percent of par value. Common shares could be sold to an underwriting syndicate at $12.60 per share, which represents a I O-percent discount from the current market price. After-tax issuing and underwriting expenses would be 5 percent of the issue price. Current shareholders expect a yield of 15 percent on their investment. Retained earnings are insufficient to fund anticipated new capital projects. Compute the firm's weighted average cost of capital based on current market-value weights.