Problem: You have been asked to calculate the weighted average cost of capital for Future Flow Enterprises (FFE) and have been provided with the following information to complete the task.
1) The company's effective tax rate is 40%
2) FFE currently has a bond issue outstanding, with a market price of $1,136.28 per $1,000 face value. Each bond pays 8% interest, with interest paid semi-annually.
There are 14 years remaining until maturity on this issue
3) FFE has 100,000 preferred shares outstanding, with a stated dividend of $10.50 per share, and an average issue price of $105.00 per share. The current market price of these shares is $113.45
4) FFE common shares currently trade at $50.00 per share. Its last dividend was $4.15 per share, and dividends are expected to grow at a constant rate of 4.00% for the foreseeable future.
5) FFE's target capital structure is 30% debt, 10% preferred equity and the balanceas common equity
6) FFE estimates that retained earnings will be $250,000 for the coming year
Based on this information what is the weighted average cost of capital for FFE (round all calculations to 4 decimal places)?
a. 0.0395
b. 0.0657
c. 0.0716
d. 0.0793
e. 0.0833