Weight Average Cost of Capital
Twin Lakes Research Inc. (TLRI) is financed as follows. It has 250,000 common shares issued and outstanding, which were priced at $40 this afternoon.
The expected return on the market is 8%, 90-day Government of Canada T-bills are yielding 2%, and TLRI's common stock's Beta is 1.5. TLRI also has 100,000 preferred shares issued and outstanding, which pay out a dividend of $2.00 per year and are currently valued in the market at $25 per share. Bondholders have lent TLRI $5,000,000 in bonds with a 6% semi-annual coupon and maturing in 10 years.
These bonds now yield 7% compounded semi-annually and have a market value of $4,644,700. TLRI has a marginal corporate tax rate of 20%.
a. What is the expected return on TLRI's common stock?
b. What is the expected return on TLRI's preferred shares?
c. What is the yield to maturity on TLRI's long-term debt?
d. What is TLRI's weighted average cost of capital?
Please show your work as best as possible including fomulas and please answer all parts of the problem.