Problem:
Phillips Equipment has 80,000 bonds outstanding with a par value of $1000 each and a quoted price of 103. The bonds carry a 7.75% coupon that is payable semiannually and mature in 25 years. The company also has 75,000 shares of 7 percent preferred stock and 2.5 million shares of common stock outstanding. The preferred stock sells for $65 a share. The common stock has a beta of 1.34 and sells for $42 a share. The U.S. Treasury bill is yielding a 2.8 percent and the return on the market is 11.2 percent. The corporate tax rate is 38%.
Required:
Question: What is the firms weighted average cost of capital?
Note: Provide support for your underlying principle.