Trois-Rivieres Manufacturing has 10, 000 bonds (face value of $1,000 each) with a 10 percent coupon maturing in 8 years. Its preferreds (100,000 shares) have a face value of $25 and pay at 7.5 percent dividedend, and it has 600,000 common shares outstanding. Retained earnings are reported at $4,500,000.
During the last five years, Trois-Riveres Manufacturing has enjoyed steady growth, with common stock dividends growing from $0.80 to $1.23 (just recently paid). The common share price currently trades at $15.00. If new shares were issued at $15.00, they would require flotation expenses of 7 percent of proceeds.
The preferred shares currently trade at $26.50, and any new issue would require flotation expenses of 5 percent of price to investors.
The bonds currently pay interest semiannually and are trading at a price that yields a nominal 12 percent annual rate (12.36 effective annual rate). Flotation costs of new debt would be 4 percent of price to investors.
Trois-Rivieres tax rate is 38 percent, and equity financing would require a new share issue.
a) calculate the weighted average cost of capital of Trios-Rivieres Manufacturing.