Salem Company has the following capital structure: 4.0 million shares of stock, selling at $29 each, with β = 1.3; zero-coupon bonds with face amount $65 million, maturing in 8 years, with yield to maturity 7.0%; and 700,000 shares of preferred stock selling at $15 per share, paying a dividend of 40¢ per quarter. The income tax rate of Salem is 33%. The risk-free rate is 2.8%, and the expected return on the market 14%. Do not use the original issue discount. Find the weighted average cost of capital for Salem. Show solutions