Mini Case - The balance sheet that follows indicates the capital structure for Nealon Inc. Flotation costs are (a) 15 percent of market value for a new bond issue, and (b) $2.01 per share for preferred stock. The dividends for common stock were $2.50 last year and are projected to have an annual growth rate of 6 percent. The firm is in a 34 percent tax bracket. What is the weighted average cost of capital if the firm's finances are in the following proportions?
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Type of Financing
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Percentage of future financing
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Bonds (8%, $1,000 par, 16-year maturity)
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38%
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Preferred stock (5,000 shares outstanding, $50 par, $1.50 dividend)
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15%
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Common equity
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47%
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Total
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100%
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a. Market prices are $1,035 for bonds, $19 for preferred stock, and $35 for common stock. There will be sufficient internal common equity funding (i.e., retained earnings) available such that the firm does not plan to issue new common stock. Calculate the firm's weighted average cost of capital.