Question: MacLeod Manufacturing Company is trying to calculate its cost of capital for use in making capital budgeting decisions. Mr. Bailey, the vice-president of finance, has given you the following information and has asked you to compute the weighted average cost of capital.
The company currently has outstanding a bond with a 10.6% coupon rate and another bond with an 8.2% coupon rate. The firm as been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 11.5%. The common stock has a price of $60 and an expected dividend of $1.95 per share. The last four per share dividends paid by the company have been $1.80, $1.64, $1.49, and $1.35. The preferred stock is selling for $80 per share and pays a dividend of $7.60 per share. The corporate tax rate is 30%, and the target (or optimal) capital structure is 25% debt, 10% preferred stock, and 65% common stock. What is MacLeod's weighted average cost of capital?