Question: Alpha Co. is financed with 10,000 shares of common stock selling at $10/sh, 10,000 shares of preferred at $20/sh, and 700 bonds with coupon rate 6% and face value $1,000 selling at par. We think that the cost of equity capital is 15%, and we know that the preferred shares promise a dividend of $2.00/sh.
What is our estimate of the firm's average cost of capital? For what kind of project could we use the firm's average cost of capital as the project cost?